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Answer on Economics of Enterprise Question for LaMarcus Streeter

Question #7230

Recommend three policy changes that would make the Federal Reserve’s job of controlling U.S. interest rates easier. Explain your reasoning.

Expert's answer

1. The U.S. Federal Reserve should in short-term period publish forecasts of interest rates, which may lead to delay raising a key indicator of the FRS – Federal funding rate, which is close to zero. This decision is a milestone in the important condition to increase transparency of decision-making process and can slightly support the economy, bringing together the expectations of financial markets represent the views of the Central Bank.
2. To ensure stable and effective control of interest rates, the U.S. Federal Reserve ought to establish a program of inflation targeting. This is due to the need to preserve incentives in the American economy, despite some reduction in unemployment but rising oil prices could lead to a temporary increase in inflation.
3. Abolishing of Foreign Exchange Regulation – reducing long-term interest rates by buying long-term bonds and mortgages. This will strengthen the position of the dollar on world markets, despite the fact that officially America is still talking about the benefits of a strong dollar, but lower interest rates makes the dollar exchange rate more weaker.
And while investors are looking for higher returns outside the U.S., withdrawal of dollar exchange rates increased in emerging markets worldwide.
The U.S. Federal Reserve bought mortgages over $ 1 trillion. Their value will decrease when the economy recovers, which is why nobody in the private sector doesn’t want to buy them.


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