Question

1. How do you explain the challenge the Fed has faced in raising the inflation rate to its 2 percent annualized target?
2. What are the major challenges facing the Federal Open Market as it addresses issues related to the shutdown of the economy?
3. To what extent do you think the decentralized structure of the Fed is a benefit or a hindrance to its ability to function effectively?
4. To what extent should the independence of the Federal Reserve within government be secured during a time of crisis?

Answer 1

Inflation plays a key role in determining the health of an economy. With the advent of the pandemic spread and the shutdown procedures that followed, there has been considerable effects on the inflation rate in the economy,. The US inflation rate was pulled down from 2.5% to almost 1%, but the government has taken very pro active measures so as to raise the rate and now it has reached 1.54%. In order to contain the lowering inflation due to decreased demand for money, the US government introduced a $2.2 trillion package on a $20 trillion GDP base. The stimulus package has helped the inflation to rise by a small factor. The government has also taken measures to lower the interest rates which has been almost reduced to 0%. Thus, all the above factors have lead to the raising of inflation by a factor that has now reached a somewhat managable situation.

The global shutdown measure taken the world economy has affected the open market operations on a large scale throughout the world. Due to shutdown measures, there has been a sharp decrease in the production as most of the industrial units have been shut down. The demand for many commodities have fallen down as only essential commodities are on sale in the market. Since most of the people have been restricted to their homes and most of the online markets have been restricted to sales of essential commodities, most of the open market operations have been affected in the US economy.

Decentralised sttructure of a central bank or the federal reserve is a quintessential factor for transfer of fiscal policies to all the sectors of an economy. Moreover, it helps in the equity distribution of wealth and monetary benefits to all sections of the society thereby helping the economy to function on a more stable base.Since the federal reserve maintains a decentralised structure, it has helped the national economy to boost itself and the effect on local market structure has also allowed the local economy to grow which has a profound effect on the national economy.

At the time of crisis, it is essential to maintain a balance between monetary and fiscal policies. If there is a difference in the approach between the two models, it would result in the failure of economy as a whole. For example, during a crisis like the current pandemic, a lot of money has to be spent on healthcare and to meet the basic needa of the citizens. Thus the government have to take such policies ao as to bring stimulus to the narket and also foster basic growth of the economy.The federal reserve at the same time has to take decisions like cutting the interest rates and such open market operations so as to stimulate the economy. Thus, a balance has to be maintained in the policy effects of both the government and the federal reserve so asnto maintain the economic stability of the nation.