The Pros And Cons Of Expansionary Monetary Policy

“Make America Great Again” is the slogan Donald Trump carried across the United States, winning the Electoral College and bringing forth a new presidency surrounded by doubts of uncertainty. With uncertainty greater post-election, it is up to the government and the Fed to ensure the economy remains stable and people’s confidence in the dollar strengthens. President-elect Trump has proposed an expansionary fiscal policy where he aims to increase government spending on infrastructure and the military to stimulate the economy and increase employment, all while cutting taxes. As a result, the Fed may choose to pursue a contractionary monetary policy and increase interest rates in order to decline investment and GDP and fight inflation (Reuters). …show more content…
Additionally, they have a “dual mandate” to keep in mind: maximum employment, stable prices (low inflation), and moderate long-term interest rates. The Fed monitors unemployment, labor force participation, inflation, hires rate, quits rate, and long-term employment when deciding on a policy to address all uncertainties about the economy (Jamrisko). The Fed might raise interest rates in order to prepare for an upcoming recession. An increase is necessary because if rate remain low and a recession hits, the Fed may not be able to lower interest down if it is already low. Furthermore, if interest rates change after a recession, this could lead to a greater economic downfall that could have been prevented by increasing at a steady rate earlier. My recommendation is that the Fed should increase interest rates steadily in order to protect the economy against a potential recession. If there is an increase in government spending, GDP will increase, but higher interest rates will decrease investment spending and GDP, so an uncertainty will always …show more content…
This essentially means borrowers are paid and savers are penalized. This tactic is used to get consumers to spend more and save less, however, I do not think the Fed will do this since the effect of the policy is uncertain and risky. The Fed’s main goal in coming years is not to create economic growth, but to reduce spending and inflation.
The distribution gap between the wealthy and the poor has become larger in recent years, especially with the diminishing middle-class. To reduce this gap, Trump wants tax cuts to entice spending, but during uncertainty, households will be inclined to save more and spend less. In addition, Trump hopes to increase US manufacturing jobs but despite the labor generated by new infrastructure projects, the middle-class manufacturing jobs will continue to diminish if there is a lack of investment spending by businesses once interest rates increase.
Trump once said, “Everything that is broken today can be fixed, and every failure can be turned into great success” (Trump). Although there is much uncertainty surrounding both Trump policies and the Fed’s decisions, I for once hope Trump’s promises come

Related Documents