Inflation Federal Reserve
The Federal Reserves effect on Inflation
Inflation Page 1
Our group chose to discuss how the Federal Reserve Bank affects the inflation of our economy. Our interest was sparked through the classroom discussions on how the Federal Reserve’s decisions had a direct affect on how our economy faired and the bad shape that our economy is in as of now. The Federal Reserve was created in 1914 after a series of bank failures; there are 12 districts that make up the federal banking system, and 25 branch banks.
The Federal bank has seven governors that make up its board that each serve 14 year terms and has a president that is voted in and serves a four year term. Alan Greenspan, the longest serving president (1987- 2006), has just recently stepped down as president and Ben Bernanke is now the residing president.
Through Greenspan’s reign the economy has faired well enough, but over the last few years of his career inflation and money supply have changed drastically. Due to the War on Iraq and President Bush’s idiotic spending habits our economy is now going into recession. Bernanke has several new policies that he plans to put into effect to inform the public of decisions that will be made regarding the economy and the state that it is in. Furthermore, with the coming presidential election we as a people can only hope that with a new president will come tax increases to help pull our rapidly inclining inflation rates, and decreasing money supply.
The members of the Federal Reserve Bank meet every six weeks to discuss the issues concerning how the economy is doing. The members that are on the board makes important decisions should the discount rate increase or decrease. For decades the U.S Federal Reserve Board views the U.S. economy, when unemployment falls too low, inflation increases and when when employment raises inflation decreases. Inflation is influenced less by the changes in unemployment is that the public has com to expect inflation to remain stable.
This is a perfect example of why the economy was so pleased with Greenspan’s technique of handling inflation and helping the economy of falling into a recession. The new view of the economy helps explain why the Fed stopped raising interest rates last summer while core inflation which excludes food and energy prices, was rising. Because of this the Fed is very reluctant to cut rates now, even though it see the inflation edging lower over the next two years.
When the Board of the federal reserves sees that the economy is heading towards a recession there are a number of solutions that can be implemented to aid this issue of heading in a downward slope. One thing the Federal bank can do is purchase back bonds from bond holders. By purchasing back bonds it creates more money in the economy which causes the commercial banks to hold more money and issue out more loans. Though this trend has been under way for years the Fed economist and other have incorporated it into mainstream thinking.
This is also a solution when the Federal Reserve desire to decrease the public money holding, the Fed sells government bonds. When they sell bonds the fed receives money from bond holders. The fed bank does this so that there would not be an excess of money which causes higher inflation. This is a perfect example of what happened to Germany from 1921-1924 which caused a hyperinflation resorted from printing too much money.
In the article “Consumer Inflation Holds Steady”, it states that inflation pressers stayed steady in October according to the government’s key inflation measure released on November 14, 2007 that matched the economics’ forecast. However, it states that the consumer price index at the retail level rose 30% in October. It also say’s that the fed is concerned with core inflation readings than the change in overall prices, since fed policy only limited impact on food and energy prices.
The inflation rate as whole stayed steady in October but took a turn for the worst in the months off September. The Consumer Price Index stated that the retail level rose 0.3% that match the increase in September. Another source by the name of briefing .com match the census estimate and survey that show a high rate off inflation in retail level.
The most important is the core things like food and energy which is more important than the retail level reported rising 0.2% in the months off September and October also which match the Economic Forecast ass well.
With all this rise in off inflation on retail level, food and energy why did the government key inflation release information that inflation pressure stay study in the month October and the following month, according to the governments key measure that was released that match the economic forecast.
With all these different measurements and surveys done by different company and the government only having one main company that measure the rate of inflation who is to say who is right or wrong about inflation one thing is for sure we no it did not stay steady in the month of October or September. Should the government be able to put inflation regulation and loop holes on just things that are the core of your economy like energy and food, and not things like the retail level which are raising sky high does government want to benefit big business, or the economy as a whole.
A particular high interest rate has Ben Barnanke president of the federal since 2006 who he took over for Alan Greenspan. A true and accurate reading is highly important for those trying to judge what the Federal Reserve cut rates at it last two do to a slowing economy. Do to the worries off inflation and the accurate and inaccurate measure off inflation the federal reserve probably keep rates the same and unchanged them even the a lot more surveys show inflation going up.
Why is it that in the past year the fed concentration has not been on inflation ass a hole but on the core off inflation? For example if the fed were to raise the inflation an not cut rates. It would raise inflation over all prices, would not affect the core things like food and energy which fed policy have limited impact on things lie this.
Most people think that the high inflation rate and the lack off good measurements is back the Federal Reserve in a disposition with rates rising faster than the time expected is the Federal Reserve losing control. A recent study show that the gas prices were barely going up, but the government seasonal adjustment showed that the prices should be falling when actually the prices will be raising because off the seasonal adjustment expected up to 4 to 5 percent.
In the article “Fed share more of its thinking in its reports”, the federal reserve reveals its plan to be more open with the public about the way and reasons that decisions are made, and share information about the economic forecasts made. Starting in the month of November the Fed stated that it “will publish its economic forecast four times a year rather than twice. Most important, the forecast will look three years into the future, instead of the current two…” (Andrews).
Bernanke stated “I find it helpful to think of the projections as functioning in three different ways: as a forecast, as a provisional plan and as an evaluation of certain long-run features of the economy.” Bernanke has high expectations for the economy at this point. He also feels that the federal bank should “ announce an official target that would be a basis for Fed policy.” The general public can now give more trust into the Federal Bank, now that more information is being released. No one likes to be kept in the dark, especially when their money is involved. No one was even aware of inflation changes until 1994. “Investors and journalist had to infer the decision by watching for changes in the overnight federal funds rate.”
We have been through the depressions and we have seen first hand what a limited government influence within our market can do. From the Germany's hyperinflation of the early 1900's to Mexico's 10000 peso baby formulas; clearly there is a need for some economic oversight within our government in the form of the Federal Reserve Bank.
Inflation targeting is an economic policy in which a central bank estimates and makes public a projected, or "target," inflation rate and then attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools (merrian).
According to the House.gov the following can be interpreted. After decades of debate, the case for inflation targeting is well established. The key ingredient of the argument supporting inflation targeting: the proposition that a credible implementation of inflation targeting will calm and stabilize the various financial markets and anchor the price system. Other views do exist such as inflation targeting has no impact on financial markets and that inflation targeting lead to asset price bubble-like affects and hence to financial market implosions.
These alternative views are presented and briefly contrasted with existing empirical evidence. The following are some key evidences which highlight this affect.
Practically no evidence that inflation targeting adversely affects financial markets
While not unanimous, the weight of the existing empirical evidence appears to support the view that inflation targeting matters and will work to calm and limit the variability of financial markets as well as the persistence of inflation. This sounds like a lot of jargon but the bottom line is when these factors come about it is agreed upon by the experts that positive economic growth is the likely outcome. While some research findings are consistent with the competing hypotheses, this research has a number of perplexing issues.
The complete lack of evidence that inflation targeting has adverse effects on financial markets or the economy, adopting inflation targeting once price stability is attainted likely will make maintaining price stability easier. Which as well all should hopefully have an idea about is the key and the reason that the government formed the FED and allowed it certain allowances which help to better and stabilize our economy thus rendering us one of the major super powers of the world in respect of our economic accomplishments and wealth stature. As emphasized by others, adopting inflation targeting will help future economic performance in that gains in credibility will be preserved for future Federal Reserve chairmen.
The theoretical case for inflation targeting (IT) has been prevalent throughout the course of the last 15 years in a number of publications, including several JEC studies. The case for IT is a strong one, supported by a number of compelling arguments. According to proponents, adopting IT certainly does make a difference by improving the performance of the economy, the financial system, and the inflation rate. Recently, a few economists have broken rank with the conventional views which supported IT. These economists contend that low inflation environments are not to be associated with asset price stability. Instead, they argue that IT or low inflation environments generally can be associated with asset price movements and bubbles (or financial fragility) and asset price volatility.
According to proponents of this view, IT central banks themselves increasingly (unwittingly) work to create the environment conducive to the formation of asset price bubbles or instabilities. In closer detail, as modern central banks learn to control inflation and tame economic fluctuation, thus we gain the ability to stabilize economic activity. Certain economies will experience more risk taking, more innovation, more investment and a sometimes stronger advance in production.
An increase in stock market volatility is associated with asset price bubbles. So credible IT policies, will definitely stabilize conventionally measured price indices while at the same time create new incentives to take risk (House). In my opinion this is a good thing for our economy but one must consider I am not an economist but my money is on more positive IT development.
So basically what we gleam from all of this is the moral hazard of our policy altering behaviors. In other words the more we can predict the financial outlook and economic situation the more willing we will be to take certain risk.
Bibiliography
Saxon, Jim. "Economic Effects of Inflation Targeting". House of Representatives. November 21, 2007 <http://www.house.gov/jec/publications/109/10-18-05it.pdf>.
n/a, Editor. "inflation targeting ". Merriman Webster. November 21, 2006 <http://www.google.com/search?hl=en&defl=en&q=define:inflation+targeting&sa=X&oi=glossary_definition&ct=title>.
Barnake, Ben. "A perspective on inflation targeting". Federal Board of Reserve. March 25, 2005 <http://www.federalreserve.gov/Boarddocs/Speeches/2003/20030325/default.htm>.
