Monetary Policy and the Road Ahead

By Lockhart, Dennis | EconSouth, Winter 2013 | Go to article overview

Monetary Policy and the Road Ahead


Lockhart, Dennis, EconSouth


As this issue goes to press, the Federal Open Market Committee (FOMC) has just announced a "tapering" of the Fed's program of asset purchases, or QE (quantitative easing). The Fed's bond purchases, which had been running at $85 billion per month, will be reduced to $75 billion per month beginning in January 2014. In making this move, the FOMC cited "... cumulative progress toward maximum employment and improvement in the outlook for labor market conditions."

Although I can't speak for any Fed official other than myself, I do think that the outlook for the economy justifies the beginning of QE tapering. My baseline outlook calls for an improved economy in 2014--growing a bit faster than it has been. One important driver of GDP growth is consumer spending, and there is reason to hope for strengthening in that sector as real personal income growth and household balance sheets improve. I also expect labor markets to continue their gradual recovery. And I think that inflation will move from its currently low level in the direction of the FOMC's 2 percent target.

But that may not happen. There is a reasonable chance that 2014 will not differ much from 2013. Next year's economic outcomes will be significantly affected by fiscal outcomes, including the ongoing effects of the tax increases in early 2013, the effects of the sequester, any lingering effects of the government shutdown this past fall, and the effects of fiscal policy uncertainty on business investment and consumer spending.

Inflation and employment

Two keys to next year's performance will be inflation and employment. In January 2012, the FOMC established an official inflation target of 2 percent as measured by the personal consumption expenditures, or PCE, price index. While inflation has been reasonably stable, it's averaged about 1 percent this past year, well under the FOMC's longer-term objective. Some of that shortfall has come from falling energy prices. But even if we look through the behavior of energy prices, inflation readings

have been exceptionally soft, and this trend bears careful watching.

Employment is growing at a pretty steady, if unspectacular, pace. The October and November jobs reports were encouraging, and in November, the unemployment rate fell to 7 percent, down from 7.7 percent a year earlier. Monthly job gains over the past three months have averaged a bit over 190,000. In that sense, there has been substantial improvement in labor markets over the past year.

Offsetting the job gains are other factors that are less encouraging. Longterm unemployment is at historically high levels. And the number of people working part time while looking for full-time work remains elevated. There are about 4 million more people unemployed today than before the recession. And there are significant numbers of discouraged workers who are not counted in the labor force who would return if conditions were more encouraging.

Overall, I am fairly confident of the economy's progress, but it's possible that at year-end 2014, inflation will still be too low and employment levels will be well short of the goal. Therefore, monetary policy should remain very accommodative for quite some time. The mix of tools the FOMC uses to provide ongoing monetary stimulus may change, but any changes will not represent a fundamental shift of policy. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Monetary Policy and the Road Ahead
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.