Monetary Policy

Related to inflation is the strength of the U.S. Dollar, and its impacts on the trade balance. As the U.S. Dollar maintains its strength, the U.S. will continue to favor imports. A weakening of the dollar will increase exports, but will also decrease consumer’s purchasing power. A weakening dollar will likely increase shareholder outcomes, but it may contribute to rising income inequality.

Major Challenges
The Fed is likely going to grapple with three major challenges both now and over the next several years: one, creating a plan to raise interest rates; two, the changing role of macroeconomic policy; and three, uncertainty in fiscal authorities and American politics.
The current Federal Reserve is currently trying to grapple with how
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There seems to be a need for increased understanding in academia. In a speech at the Federal Reserve Bank of Boston on 14 October, Ms. Yellen requested that economists help the FED try to gain a deeper understanding of how recent global trends are shaping the effects of monetary policy. As a reason for why the Fed has been unable to stimulate the economy, Ms. Yellen hypothesized that households and businesses with higher debt loads are unable to take advantage of lower interest rates. Our understanding of inflation is also being challenged by current conditions, specifically the “influence of labor market conditions on …show more content…
macroeconomic policy philosophy. According to Delong, the philosophy for pre-2007 monetary policy in the U.S. was to set interest rates in a countercyclical fashion according to the Taylor principle, which specifies the ratio of interest rate change in response to various economic conditions, with a few available exceptions. Even at near 0%, the Fed was willing to engage in open markets operations and quantitative easing, but “helicopter money” and excessive stimulus were not acceptable. The outlook on fiscal policy was to use it only as an automatic stabilizer and for long term fiscal balance. Fiscal authorities were viewed as too slow and incompetent, and monetary policy was seen as powerful enough. The outlook on banking and regulatory policy was extremely laissez-faire, because the Fed’s monetary policy tools were viewed as powerful enough to combat any systemic financial risk. Before 2007, the policy rule for banking/regulatory crisis management was to follow the Bagehot rule. The Bagehot rule is that in financial crisis, the central bank should lend freely to institutions who are solvent but illiquid at a penalty rate. The penalty rate should dis-incent banks to take positions that create systemic risk. If an institution is insolvent, but systemically important, the central bank should resolve it

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