US Economy and Expected Monetary Policy - Assignment Example

US Economy and Expected Monetary Policy Grade (November 20, US economy and expected monetary policy According to Velasco, what did the Federal Reserve Board of Governors announce and why is it important? The Federal Reserve Board of Governors announced the end of the quantitative easing program that it was previously undertaking (Velasco, 2014). This announcement is very important, due to the fact that it means there is no longer the unconventional stimulation of the economy, on the event that the conventional monetary policy fails to maintain a healthy economic interest rate. This is because; quantitative easing is a program that is operated by central bank, where the bank purchases securities from the government, financial banks and private institutions in order to increase the monetary supply, while at the same time lower the interest rates (Heather, 2012). This measure is normally applied under circumstances where the economic activities are low, the interest rates tends to zero and the borrowing and lending activities have declined sharply, such that there is very little money circulating in the economy. Thus, the announcement by the Federal Reserve Board of Governors that the quantitative easing program will no longer be operational may send a scare to all the sectors of the economy, since it effectively eliminates a system that helped lower the interest rate when the conventional monetary policy was unable to address the problem (Heather, 2012). Therefore, to the extent that the Federal Reserve will no longer be operating the quantitative easing, then, the sole mechanism to be relied upon to determine the interest rates in the economy is the conventional monetary policy. The sole dependence on the monetary policy to control the interest rates puts the economy at a higher risk of interest rates fluctuations (Heather, 2012). According to Velasco, what are the current economic trends that support the Feds decision? The current economic trend that support the Feds decision, according to Velasco, is the fact the interest rates will remain low for a considerable period of time before they start rising once again (Velasco, 2014). This means that the economy will still be able to function in a healthy manner, owing to the fact that the quantitative easing program was implemented in 2008 following the economic crash of 2008-2009, which threatened to halt the economy (Velasco, 2014). In this respect, the stoppage of the quantitative easing by the Federal Reserve is supported by the fact that the interest rates are not likely to hike within the foreseeable future, which then means that the quantitative easing program will be of no use running, when it is not controlling the interest rates, since they are already low and expected to remain so for a considerable period of time. The other economic trend that supports the Federal Reserve decision is the fact that the underutilization of the labor resources in the economy is diminishing gradually (Velasco, 2014). This then means that there is a high potential for the reduced unemployment in the labor markets. The effect of reduced unemployment in the labor market is that there will be healthy circulation of money in the economy, thus, the Federal Reserve quantitative easing program will be of no use in stimulating increased monetary supply and increased liquidity for the commercial banks, as the healthy labor markets will cater for the same. The last current economic trend supporting the Federal Reserve decision to halt the quantitative easing is the fact that the inflation rate is consistently running low, at below 2% (Velasco, 2014). Therefore, the quantitative easing program of the Federal Reserve will not be doing much in controlling the interest rates and the monetary supply, since the economy will already have a healthy spending rate associated with low inflation. According to your first article, was the Feds decision the right thing to do right now? Why or why not? According to Greg Robb’s article of November 19, 2014, “Fed pushed to say more about pace of coming rate hikes”, the move by the Federal Reserve to freeze the quantitative easing program that offered room to purchase financial assets in order to stimulate the economy is the right thing to do now, since the interest rates are likely to remain close to zero for a considerable period of time (Robb, 2014). Thus the Federal Reserve would be risking extending the period of maintaining the interest rates low, on the event that it continued with the quantitative easing program (Robb, 2014). Further, it is expected that the inflation rates will start moving higher, from the below 2% mark in the near future, which would in turn help in the recovery of the USA domestic economy, despite the perceived weaker economic outlook of China, Europe and Japan (Robb, 2014). The effect of the announcement was to produce mixed reactions in the stock markets, with the U.S. stocks SPX, +0.20% dropping, while the 10-YEAR, -0.17% which measures the 10-year-yield returns on the financial assets remained steady at 2.35% (Robb, 2014). According to your second article, was the Feds decision the right thing to do right now? Why or why not? However, according to the second article by Caroline Valetkevitch, “Market Wrap: Stocks Edge Lower on Rate-Rise Worries”, also published on November 19, 2014, the Federal Reserve decision was not the right thing to do, since it has caused the tightening of the market conditions causing the US stocks to edge lower, as the announcement left the investors uncertain when the interest rates are likely to go high (Valetkevitch, 2014). Both the Dow Jones and S&P 500 stocks have underperformed since the announcement made by the Federal Reserve on October 29, as the short-term security holders are still betting on the rise of the interest rates at around September 2015, causing the sluggishness in the stock market transactions (Valetkevitch, 2014). All the stock market seems to be reacting negatively to the announcement, with the Dow Jones industrial average losing 2.09 points as at Wednesday, while the S&P 500 index lost 3.08 points (Valetkevitch, 2014). The Nasdaq composite stock market was not spared either, since the market lost 26.73 points after the announcement by the federal Reserve, which is an overall drop in the market’s performance by an average of 0.57 percent (Valetkevitch, 2014). However, in overall, the Tech-stock market was the highly affected by the announcement, owing to the fact that Nasdaq Composite registered only 42 new highs compared to the 74 new lows in the 52-weeks index, compared to the S&P 500 30 new highs and only 3 lows (Valetkevitch, 2014).The overall effect of the announcement by the Federal Reserve was to cause a snap of the US stock markets, such that only an average of 5.8 billion shares were transacted during October, compared to the October monthly average of 6.4 billion (Valetkevitch, 2014). What does hawkish mean in this context? How do the three articles compare in the type of support they present for a hawkish monetary policy right now? Hawkish, in this context, is applied to mean the expectations of high interest rates in the economy (Velasco, 2014). The three articles compare in their support on the hawkish monetary policy. First, the article by Schuyler Velasco “Fed says goodbye to historic bond buying program: 4 key takeaways”, offers the opinion that since the likelihood of inflation going below the 2% mark has diminished, a hawkish monetary policy will be suitable for the economy, to avoid maintaining the interest rates close to zero for longer than the Federal Reserve had already anticipated (Velasco, 2014). The same comparative support is offered by the second article by Greg Robb, “Fed pushed to say more about pace of coming rate hikes”, through observing that the interest rates are predicted to remain below what “Fed views as normal”, which then means that there is a need for a hawkish monetary policy, which will serve to raise the interest rates, and thus alleviate the possible risks associated with a below-normal interest rate (Robb, 2014). The third article by Caroline Valetkevitch, “Market Wrap: Stocks Edge Lower on Rate-Rise Worries”, compares in offering support for a hawkish monetary policy, by providing that the Fed would raise the interest rates for the short-term securities faster than the market expects, once it has set on the process of tightening the monetary policy (Valetkevitch, 2014). The US short-term interest security investors were betting that the interest rates are likely to rise starting the September of 2015, thus causing the Dow and S&P 500 to underperform (Valetkevitch, 2014). Thus, a hawkish monetary policy will stimulate these stock markets and thus offer more opportunities for healthy economic progress. How would you rate the Feds decision and why? What additional information would be useful in more fully evaluating the Feds decision? Why? Based on the three articles, the Federal Reserve decision can be rated as bad. This is because, according to Velasco (2014), the announcement caused the Dow Jones stock market index to fall by 31 points, while at the same time the S&P 500 stock market index also fell by 2.75 points. The same trend has been observed by the articles published in the month of November, where the latest articles have observed that the Federal Reserved announcement has affected the stock markets and the investors in US short-term interest securities adversely. For example, the U.S. stocks SPX, +0.20% dropped after the decision by the Federal Reserve was announced (Robb, 2014). Additionally, the three major stock-markets have registered poor performance ever since the Federal Reserve announcement was made, with Dow Jones stock-market index losing 2.09 points, the S&P 500 index losing 3.08 points and the Nasdaq composite losing 26.73 points (Valetkevitch, 2014). Further, the monthly average shares that are traded in the stock market has declined by a reasonable percentage, with the October’s monthly average of traded US shares dropping from 6.4 billion to 5.8 billion shares (Valetkevitch, 2014). The additional information that is necessary for evaluating the Feds decision more fully is the exact rate increase and when the rate is going to increase after the implementation of the non-quantitative easing decision. This information will help investors to make solid decisions on how to invest in different economic areas. References Robb, G. (2014, November 19S). Fed pushed to say more about pace of coming rate hikes. Market Watch. Available at: http://www.marketwatch.com/story/fed-pushed-to-say-more-about-pace-of-coming-rate-hikes-2014-11-19 Valetkevitch, C. (2014, November 19). Market Wrap: Stocks Edge Lower on Rate-Rise Worries. Daily Finance. Available at: http://www.dailyfinance.com/2014/11/19/market-wrap-stocks-edge-lower-federal-reserve-interest-rates/ Velasco, S. (2014, October 29). Fed says goodbye to historic bond buying program: 4 key takeaways. The Christian Science Monitor. Available at: http://www.csmonitor.com/Business/new-economy/2014/1029/Fed-says-goodbye-to-historic-bond-buying-program-4-key-takeaways-video Heather, M. (2012). Quantitative Easing - Unabridged Guide. Emereo Pty Limited. Read More