Question

What is the current macroeconomic situation in the U.S.? What should the Fed do about it? What monetary policy tools should the Fed use to achieve the result(s) you just recommended?

Answer 1

1) Macroeconomic factors such as GDP growth, inflation rate, unemployment rate and foreign trade of the US economy can be termed as satisfactory. The GDP growth rate of USA was 2.2% in 2012 which rose to 2.6% in the last quarter of 2017. According to the latest report of World Bank, USA has emerged as fifth largest world economy. Economists also expect 2.6% GDP growth rate of US economy in the current fiscal 2018. Also comparing to unemployment rates of 2012 which was 8.1%, current unemployment rate in January 2018 is 4.1% which shows downward tendency and it means that new jobs are added in the economy. The total number of employed persons in 2012 was 135 million which rose to 153.34 millions in 2017. The inflaton rates in 2012 was 2.1% which remained stagnant in 2017 also. The total US exports to foreign countries was $2.3 trillion in 2017. Capital goods and engineering goods contributed to majority of US exports in 2017 while services stood second in total US exports to foreign countries. The total imports of USA in 2017 amounted to $2.9 trillion. Goods especially capital goods constituted majority of US imports in 2017 while services contributed nearly 18% of total US imports in 2017. Industrial production rate of USA was 3.4% in last month of 2017 that increased to 3.7% in January 2018.

B) Considering present stable macroeconomic factors in US economy, Fed should keep key interest rates unchanged. It kept key interest rates unchanged at 1.25-1.5% in January 2018 but may likely to increase interest rates in its next monetary policy if inflation rate increases. The present macro economic parameters may change as a result of new tax legislation of the Trump administration. Earlier Fed raised the interest rate by 1.25-1.5% in December 2017 anticipating slow GDP growth and high inflation.

3. Fed in its January 2018 FOMC meet decided to achieve maximum employment and keep the inflation rate to 2%. The current inflation rate is 2.1% which is nearabout the estimated target and employment rate is also growing rapidly. Considering these factors, we can say Fed should keep key interest rates unchanged in its next monetary policy.