The State of the Economy
The federal economic report considers the economy to be resilient and it does not consider the existing trade tensions to have any negative effect on economic growth. Interest rates are expected to increase gradually to ensure they return to normal levels that have been experienced in the past. In June, interest rates were increased to 2 per cent from 1.75 per cent with a possibility of further increases in the year 2018 (Federal Researve, 2018). Inflation was maintained close to the federal government’s annual target of 2 per cent, which supported strong growth in the economy and decreased the unemployment rate (Federal Researve, 2018). The report demonstrates that there was an increase in economic activity during the first half year period, which was accompanied by a strong labor market (Federal Researve, 2018). The economy is also expected to grow at 2 per cent per year while the unemployment rate is expected to decrease to 3.6 per cent (Federal Researve, 2018). The economy, however, is experiencing some persistent concerns, which include sluggish wage growth.
Most workers had constant earnings during the past year when adjusted for inflation while other components, such as benefits offered by employers like healthcare increased slightly, which is against expectations as the unemployment rate is nearly 4 per cent. Based on the report, persistent weak labor productivity is the cause of the slow wage growth (Federal Researve, 2018). The report does not consider the escalating trade war to be a threat to economic recovery. The report attributes reduced participation in the workforce among less educated citizens partly to job automation due to technology. It also states that participation of women in the workforce has reduced compared to other developed economies due to workplace family policies that fail to support working parents.
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Is the fed concerned more about inflation or the possibility of a recession?
The federal government is concerned more about inflation to maintain economic growth. The increase in interest rates demonstrates this concern. The report also shows that the federal government desires to increase interest rates to hinder overheating in the economy. There are further expectations of an increase in interest rates besides the June increase. Interest rate increases are also slow to ensure that economic growth does not slow down. The report, however, signals that interest rates may be increased past the target 2 per cent to accommodate economic growth. The report forecasts inflation to reach slightly above 2 per cent in the future, which is considered a comfortable figure due to the slow growth in wages (Federal Researve, 2018).
What is the stated direction of recent monetary policy?
The stated monetary policy direction is the continuing removal of monetary policy accommodation (Federal Researve, 2018).
What policy actions have the fed taken to confirm that direction?
The actions that the federal government has taken to confirm this direction include increasing the benchmark interest rates and signaling that two extra increases were expected in 2018. Besides, this is the second increase in rates this year (Davidson, 2018), which brings the government’s benchmark to about 2 per cent. Rates reached this percentage in 2008 when the economy was contracting and the government was compelled to reduce rates toward zero (Federal Reserve, 2008). The government believes that the economy is strong enough to allow it to increase the cost of borrowing without slowing down economic growth. The increase is part of the government’s gradual steps to return rates to normal levels and it reflects the commitment of the government to ensure that inflation reaches the 2 per cent target (Federal Researve, 2018).
How those policy actions could affect your potential business decision making?
These policy actions mostly increase the cost of borrowing, which means that the ability of the business to grow will be affected. High-interest rates lead to expensive loans (Dransfield, 2014), which may compel businesses to avoid borrowing and redirect other resources from reinvestment, expansion plans and innovation (Dransfield, 2014). Sales will also reduce as consumers will be forced to spend more on personal loans, which mean that businesses may be forced to reduce production or workers.
References
Davidson, P. (2018, March 21). Fed raises rates, keeps forecast for 3 hikes in 2018. USAtoday . Retrieved October 5, 2018, from https://www.usatoday.com/story/money/2018/03/21/fed-powell-hikes-interest-rates- consumer-loans/444986002/
Dransfield, R. (2014). Business economics . London: Routledge.
Federal Reserve. (2008, July 15). Monetary Policy Report to Congress. Retrieved October 5, 2018, from https://www.federalreserve.gov/monetarypolicy/mpr_20080715_part2.htm
Federal Researve. (2018, July 17). Testimony by Chairman Powell on the semiannual Monetary Policy Report to the Congress. Retrieved October 5, 2018, from https://www.federalreserve.gov/newsevents/testimony/powell20180717a.htm
