Question

A column in the New York Times in 2017 was titled “The Low-Inflation World May Be Sticking Around Longer Than Expected.” Are the low inflation rates of recent years entirely the result of Federal Reserve policy? Could they have occurred without the Fed having a mandate to achieve price stability? Briefly explain.

Answer 1

SOLUTION

THE LOW INFLATION RATES OF RECENT YEARS ENTIRELY THE RESULT OF FEDERAL RESERVE POLICY

federal reserve could find itself fighting too low inflation for the years to come Federal reserve doesn't have a good understanding of why it's been so difficult to get inflation back up. But with global growth showing and the population of most advanced economies aging, this new fighting inflation from below is going to be with a longer period of time than just a few years. As a result a new policy framework will be likely be required, to boost inflation. The federal reserve policymakers are in the midest of year-plus review of new possible approaches, including one in which the Fed would encourage too-high inflation to make up for periods of low inflation. Early indications are that any changes will likely to be modest. The Fed lowered U.S interest rates three times last year, to a target range between 1.5% and 1.75%, in part to keep inflation from sinking amid rising global economic headwinds. Now that at least some of those factors, including U.S-China trade tensions, have eased a bit, policy makers say they will keep rates where they are, barring a material change in the economkic look.

FEDERAL RESERVES MANDATE TO ACHIEVE PRICE STABILITY

The current mandate of the Federal reserve made its way into the Federal reserve act in November 1977. The 1970s were plagued with high inflation and unemployment, a severe adverse macro economic condition known as stagflagtion, which motivated the congress to reform the original act of 1913, with the intension of clarifying the Fed's Board of governors and the Federal Open Commity (FOMS) roles, Congress Reform Act explicitly identifies,"The goals of maximum employment, stable prices, and moderate long term investments". It is these goals that have come to be known as federal mandate. In order for people and business to make plans for the future, they need to be confident that prices will remain relatively constant over time. As a result price instability in the form of either deflation or rapid inflation have drastic consequences on economic stability.

Stable prices and long term interest rates are Federal reserve goals that directly influence each other, making them essentially one mandate