Fed Policy Is a Drag on the Economy (Essay Sample)

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Fed Policy Is a Drag on the Economy
Ben Bernanke, the Federal Reserve (Fed) Chairman and his colleagues have been looking at the recovery of the economy which has been dwindling than it was expected. Early in the year 2010, it had been predicted that the growth would be at 4% in 2012. However, as evidenced by Taylor, this came to be at a low of 2%.
Fed has scaled up mortgage and treasury securities of the U.S. and they are convinced that more purchases are due. The close to zero federal funds rates have been extended and will continue to be so for a considerable period of time. All along, the policies of Fed have yielded disappointing outcomes. Fed has pointed to external causes excluding its own policy as a possibility in its factors.
To begin with, the policy causes a lot of uncertainty. It is likely that the Fed will have to change its course in case the economy begins to get unstable. Fed might have to offset its assets to prevent inflation. As ascertained by Taylor, in the event that the assets fetch low sales, the reserves in the banks which financed the assets purchases leak away from the banks and into the economy.
If the assets sell fast, bond prices will drop with interest prices rising resulting in a recession. Such down sides are usually ignored by those who see no problem with the asset purchases and the Fed's interest rates.
The policy on zero interest rate by Fed also creates a platform for retirees, risk-averse investors, and pension funds to consider questionable investments while they look for higher gains in trying to increase their interest income. Rather than to write off loans which are bad, these low rates make it easy for banks to roll over hence lock up unproductive assets. Very low rates feed the spending urge of the president, hence increasing debt and deficits. Additionally, the Fed's venture into the fiscal policy as well as credit allocation poses queries on the institution's independence and accountability. As shown by Taylor, confidence of the central bank is thus reduced in the public domain.
The large asset purchases have created variable growth of money from 10% in 2009 to 2% in 2010 and then back to 10% in the beginning of 2012. These vast swings in supply of money have reduced macroeconomic stability. Fed's policy has however not caused runaway inflation.
Another underside is that foreign central banks tend to follow other present central banks' easy-money policies so as to prevent sharp appreciation of their currency which would be a disadvantage to their exporters. When dissenters within and outside policies of Fed point to these costs, the Federal Open Market Committee responds that the very costs are overweighed by huge benefits. Their argument is that the asset purchases and super low interest rates greatly scale down unemployment. This is through increase of the aggregate demand.
However, these models, used in evaluation of monetary policies for example interest rates rules, were not made and are useless in evaluation of Fed's unconventional policies as seen in the past few years. A basic economic analysis will show that these policies decrease the aggregate demand. This consequently increases unemployment and also represses the signaling and incentive impacts of the price system.
As further shown by Taylor, the "forward guidance" policy states that the rate in the short-term rate will be near zero in the...