FED Analysis: St. Louis Federal Reserve Bank
David Griffin
Professor Kotomin
Home Work 5
FIL 241
10-26-14
FED Analysis James Bullard is the acting CEO and President of the St. Louis Federal Reserve Bank and in his message to The Regional Economist he leaves his readers with an unnerving thought. President Bullard pointed to how the relatively abnormal monetary policy that the Federal Reserve has taken to revive the economy after the 2008 and 2009 crisis may lead to larger future economic issues. The figure he presents in his message shows the distances from the FEDS goals and normal policy for the last 40 years; the figure shows how the FED is close to reaching its macroeconomic goals while deviating 18 times more from normal policy than it was in 2007.
So currently, the FED says
it is close to reaching its goals and the FEDs goals being stability in the financial system, fighting inflation, full employment, economic growth, interest rate stability, and currency stability. Meanwhile, the balance sheet is sitting at more than $4 trillion, which is about 25% of the U.S. nominal GDP. The historically low Federal Funds rate, coupled with the massive size of the balance sheet, has created an enormous mismatch. Bullard illustrates how the aggressive monetary policy of using quantitative easy and bare bottom Federal Funds rates has created an economic environment that is reaching goals but not sustainable. This suggests that as policy gradually returns to normal and the FED steps back, that the goals will become unachievable. That is that issues like inflation and interest rate stability will be jeopardized, causing other goals like full employment, growth, and stability to suffer and possible bubbles to emerge. The current mismatch, which has in essence created a recovery dependent upon the FED willingness to continuously support it, will make it extremely difficult for the FED to step back and begin normalizing its policy.
The figure
Professor Kotomin
Home Work 5
FIL 241
10-26-14
FED Analysis James Bullard is the acting CEO and President of the St. Louis Federal Reserve Bank and in his message to The Regional Economist he leaves his readers with an unnerving thought. President Bullard pointed to how the relatively abnormal monetary policy that the Federal Reserve has taken to revive the economy after the 2008 and 2009 crisis may lead to larger future economic issues. The figure he presents in his message shows the distances from the FEDS goals and normal policy for the last 40 years; the figure shows how the FED is close to reaching its macroeconomic goals while deviating 18 times more from normal policy than it was in 2007.
So currently, the FED says
it is close to reaching its goals and the FEDs goals being stability in the financial system, fighting inflation, full employment, economic growth, interest rate stability, and currency stability. Meanwhile, the balance sheet is sitting at more than $4 trillion, which is about 25% of the U.S. nominal GDP. The historically low Federal Funds rate, coupled with the massive size of the balance sheet, has created an enormous mismatch. Bullard illustrates how the aggressive monetary policy of using quantitative easy and bare bottom Federal Funds rates has created an economic environment that is reaching goals but not sustainable. This suggests that as policy gradually returns to normal and the FED steps back, that the goals will become unachievable. That is that issues like inflation and interest rate stability will be jeopardized, causing other goals like full employment, growth, and stability to suffer and possible bubbles to emerge. The current mismatch, which has in essence created a recovery dependent upon the FED willingness to continuously support it, will make it extremely difficult for the FED to step back and begin normalizing its policy.
The figure