a classmate wrote this post, you have to reply to it.
How does the Federal Reserve stimulate the economy? When faced between continued stimulus to stimulate the economy and the potential inflationary pressure of rising oil prices, what can the Fed do and why do you think the Fed should do? Should the Fed aim for zero inflation? Discuss the pros and cons in these aspects.
The Federal Reserve can stimulate the economy via monetary policy. All they need to do is implement a policy that counteracts the direction the economy is heading. “In short, there is a decline in overall, or aggregate, demand to which government can respond with a policy that leans against the direction in which the economy is headed. Monetary policy is often that countercyclical tool of choice.” (Mathai, 2021)
When balancing the need for continued economic stimulus and the potential inflationary pressures from rising oil prices, the Federal Reserve (Fed) faces a delicate decision. The Fed could take a nuanced approach by maintaining a flexible monetary policy. One option is to continue supporting the economy by quantitative easing and low interest rates, while also being vigilant about inflation indicators. By closely monitoring inflation trends, particularly those driven by volatile oil prices, the Fed can adjust its policies accordingly. Creating a more seamless balance.
In my view, the Fed should prioritize a balanced approach. My ideal approach would consider both the ongoing need for support and the risks of inflation. Given the current economic uncertainties and the potential for inflation, I believe a cautious and data-driven approach is best.
The FED should not aim for zero inflation, this would result in a state of deflation in our economy. It should aim to have about a two percent inflation rate. “A higher inflation rate could prevent the public from making accurate longer-term economic and financial decisions and may entail a variety of costs as described above, while a lower rate might make it harder to prevent the economy from falling into deflation should economic conditions become weak.” (CleavelandFED, 2022) There are many benefits that come from a small positive inflation rate. It keeps the economy from falling into deflation, and it may improve the labor market efficiency so that employers’ may not need to lower wages when the economy is weak. (CleavelandFED, 2022) This quote in regards to a small positive inflation rate shows why zero inflation is not a realistic choice.
