Essay --

When should the Fed begin â€Å"its exit† from expansionary monetary policy? Or is this even the wrong question and should we instead be discussing further expansionary policy that can be conducted by the Fed? As Janet Yellen stated clearly in her recent testimony before the Senate Banking Committee, now is not the time for the Fed to begin â€Å"its exit† from expansionary monetary policy. Until inflation comes closer to the Fed target of 2 percent or the unemployment rate begins to steadily decline, the Fed should in fact be looking to further expansionary policy to give the economy all the help it can get. The current state of the U.S. economy in terms of unemployment, inflation and growth, allow this unique situation to be brought into light. The unemployment rate is in about three percentage points higher than it was seven years ago, before the start of the economic downturn. The employment-to-population ratio is about five percentage points lower, and it has not succeeded in recovering much since the trough of the recession. Furthermore, in a dataset compiled since 1948 the average unemployed person has been looking for work before the crisis was 22 weeks, in the aftermath of the recession of 1981-1982 (Mankiw). In the most recent recession, however, the average reached about 41 weeks and still stands at more than 36 weeks – an unprecedented number of long-term unemployment. The Fed, breaking from its historic emphasis on subduing inflation, has used inflation as a tool to solve the financial crisis and keep prices rising about 2 percent a year. Rising prices encourage consumption, increases profits, increases borrowing and investment spending. Yet despite this goal, inflation rose at an annual pace of 1.2 percent in August, just... ...useholds and businesses (consumption and investment) increases purchase of real estate, which increases the price of homes. Though increased housing prices and increased employment are both effects of expansionary monetary policy, higher housing prices do not necessarily benefit employment. Or in other words, higher housing prices do not directly benefit employment but are sometimes take to be a signal that employment is on the rise. On Wash’s point, he says that in some sense the Fed’s economic models have been â€Å"basically wrong for about 4 or 5 years.† By this he means that the models did not anticipate the crisis, or were imply incorrect during the past 4 or 5 years of the recession. The models do not take into account that policy response might be different, rather, they take into account a pattern of â€Å"snapping-back† to where they once were at a point in history.