Monetary Policy
Essay Preview: Monetary Policy
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The most recent Monetary Policy Report to the Congress submitted on July 20, 2004 characterizes the state of the economy, addresses the Federal Reserve concerns of inflation over recession, describes the stated direction of recent monetary policy, and details the policy actions of the Federal Reserve over the previous months. While the most recent published report is for the first half of 2004, the information gives reflection of what occurred, the plans for the future, and insight on how the national and global events could impact the future Monetary Policy.
The state of the economy at the time of the report was characterized as favorable and/or improving and is described as being in an expansion state. The report claims that expansion is self-sustaining, economic activity is increasing (profitability), and that there are notable gains in employment. Capital spending has increased and profits have increased. However, the expansion was described as lacking the key element of hiring to meet new paces of sales and production. Profits were not used to increase hiring at the same level, and are described as the result of using those “unexploited capabilities for enhancing productivity with minimal capital investment” in paragraph four of the Testimony of Chairman Alan Greenspan dated July 20, 2004. He addressed the fact that hesitancy continued to assume the risks involved with expanding employment, but that temporary employment continues to rise.
Although increased economic activity, increased employment, and increased energy prices lead to a rise in inflation, the report details that credit spreads remain low and that the market-based indicators of inflation expectations have declined. The report clearly indicates that inflation is more of a concern than a recession, but it is noted that many uncontrollable factors can impact this assumption. In addition to addressing the pace of inflation, the pace of expansion must be considered. Although the pace of inflation increased in 2004, it increased over a very low number in 2003. The report deemed in paragraph five of Section 1 of the Monetary Policy and the Economic Outlook that “some of the forces that contributed to the upturn in core inflation in the first half of 2004 are likely to prove transitory. In particular, the upward impetus from the rise in energy and commodity prices is like to lessen in coming quarters.” Other issues include energy uncertainties, global competition shifts, and terrorism within the United States and in the rest of the world.
Concerns of higher prices leaving less disposable income for households expected to be short lived. The Federal Reserve is reported to accordingly assess incoming cost and price data, and although the slight increase of labor costs (impacted especially by health care and pension costs) does not cause current concern for longer-term price stability. The Federal Reserve is aware