Three Major Challenges To Related To Income Inequality
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 …show more content…
Usually during a recovery, the number of job-seekers eventually decreases, and then employers start raising wages to incent workers. In that typical scenario, the FED would raise rates to prevent too rapid a growth in the economy. Although the United States is seven years into the current recovery with an unemployment rate below 5%, with very low rates, the economy is in no danger of overheating and wages are not rising at expected levels.
The second challenge facing the FED is truly understanding what the low interest rate means in real terms. The FED’s low interest rate is not actually stimulating the economy to the degree that one would expect given how low it is. Therefore, the FED doesn’t have an incentive to raise interest rates to cool off an expanding economy.
The third challenge is understanding what will happen if the FED leaves interest rates where they are. The FED typically will increase interest rates to counteract inflation, but inflation is low, so there is no incentive to increase rates from an inflationary perspective. On the other hand, low interest rates also encourage financial speculation, which increases the risk profile of the economy as whole. The longer the FED waits to raise rates, the more it incents …show more content…
In any case, the Fed needs more and better tools to stabilize the economy. Additionally, as monetary policy tools are not as powerful as they once were thought to be, the fiscal authorities need to increase their speed and competence, potentially through creating automatic fiscal stabilizers. DeLong also cautions against regulatory policies that seek to avoid macroeconomic risk by reducing market risk