Persistence problems in the U.S. deal with the sluggish employment growth, the slowdown of household consumption, and the limitations in furthering the fiscal policy. Also, a combination of excessive liquidity, low interest rates, high leverage, poor risk management, excessive risk-taking had possibly let too many assets, emerging market debt prices. Even though the US is the richest country it does (like any other country) have issues that hurt our economic performance. Monetary policy plays a key role for the development of our economy’s rate of inflation which is the Central Banks responsibility. The Fed has 3 primary functions which are to regulate the banking industry, act as Bankers Bank, and most important conducts monetary policy which the FOMC controls money supply. If the central bank fails to do so inflation can cause a plethora of problems. In today’s economy, targeting the levels of real variables and trying to pursue detection of where the unemployment rate will settle may take away from lowering inflation. GDP and the unemployment rate fluctuate throughout each year that it could raise or fall immediately and inflation could creep up even when demand is settle. William Poole shares his example; he states, “We’ve seen substantial wage increases in the airline industry; if airlines are to be profitable over time they will have to recover those costs through some combination of productivity gains and price increases, even though travel demand is not currently strong.” The higher wages in the airlines industry are directly related to inflation rising. Wages and salaries usually keep up with inflation. For instance, 2% inflation means wages will increase by 2%. In 2001, the Fed Fund rates increase 11 times to a rate of 1.75%. The following year the economy recovered but the faltering in the US recovery in the fall of 2002 and the risk of a double dip recession led the fed to reduce the Fed Funds to as low as 1%. A jobless recovery had then emerged during and continued after the war with Iraq. Inflation started to increase with growth of output and the jobs that had picked up. Will the Fed Funds rate and will that cut prevent a hard landing? Another U.S. economy vulnerability is people are saving-less and debt is a stand out. The high levels of household indebtedness (mortgages, consumer credit, etc.) with debt service costs now rising because of a credit crunch. There are a number of negative shocks such as: falling home prices, and falling home equity withdraw. Housing recession and its first fall in home process has been since the 1930s. The housing recession to worsening rather than bottoming out. The US and global recessions are associated with oil prices rising. After the Iraq war oil prices remained the same in 2004-05 because of high demand from the US and China. The issues in 2004-05 with oil prices and energy led to concerns about stagflation (low growth plus inflation). Each barrel of oil was about $70.00 and either stayed the same or increased for several months.
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