Critiquing the Federal Reserve
Brief Overview
The system of Federal Reserve for years has been relied upon by the economy of the United States and different industries in making both long- and –short term decisions as per macroeconomic forces. Federal Reserve depends on uses an aggregate model in analyzing the macroeconomic elements of the United States to provide a framework for organizational managers to examine shifts in the macro setting. By using this model Federal Reserve has been able to aid managers in interpreting the vast amount of macroeconomic information generated by the government of the United States and other sources which reflects shifts in attributes of the business institutions and individuals in different industries of the country. However, since the economic recession of 2008, the Federal Reserve has been generating conflicting data regarding the economic recovery from that economic crisis (Paul, 2014). Managers of companies from different sectors have been able to make sound economic decisions since the provided data is unreliable. The fluctuating and conflicting data have made different economists and managers of different companies question the effectiveness and applicability of the Federal Reserve. The data being provided and policies being implemented don’t give a precise direction if they are fostering short- and long-term economic planning.
The Strategic Issue
The strategic issue illustrated in this case study regarding Federal Reserve is linked to the use of the aggregate model in interpreting an enormous amount of macroeconomic data in examining macroeconomic environment changes. These changes include the rate of unemployment, gross domestic production, inflation rate, household spending, etc. As much as the Federal Reserve has been using the aggregate model in evaluating macroeconomic information and governing the economic condition by the use of both fiscal and monetary policies, since the economic recession of 2007 to 2009 it hasn’t been of great help (Paul, 2014). There are additional elements in the macroeconomic environment that the aggregate model doesn’t account for and affects the economic determinants of the United States. For instance, even though the Federal Reserve predicted the GDP of the country will increase by two percent the following year (2012), still, the production of manufacturing companies and spending of the business on equipment slowed significantly compared to the previous year (2011). The Federal Reserve didn’t account for the impact that economic stress in Europe and the dropping economies of the United States trading partners will have on the economic growth of the country. They impacted the economic growth of the United States since they were restraining from demanding exports from the country, and a significant ration of gross domestic product is made up of the export revenue.
The macroeconomic data projected by the Federal Reserve kept on being higher than the actual results. Such projection indicates failure in the aggregate model in evaluating the macroeconomic environment. As economist and organization managers started pointing fingers towards Federal Reserve, its director claimed that the error in projection is because of breezes that were being caused by still-borrowing conditions for several households and businesses. They added that the impact of restraining caused by fiscal uncertainties and policies contributed to the projection failure.
Analysis and Evaluation
Federal Reserve has been one of the successful government institutions in the United States and globally. It has managed to implement monetary policies and fiscal policies in conjunction with the government that has set macroeconomic conditions that have to facilitate economic growth (Zhu, 2018). Since its creation in 1913 as a response strategy to the series of financial panics that needed central control of the monetary system to alleviate financial crises. Subsequently, it has led the country to economic growth that has placed the United States’ economy among the world-class countries in the world. However, its downfall which has been associated with the macroeconomic model that it uses to evaluate economic determinants manifested after the economic recession of 2008. For instance, its projection for real GDP growth ranged between 1.9 to 2.4 % for 2012 from 2.2 to 2.8 % for 2013, which is lower than the projection (Paul, 2014). The Federal Reserve failed to account for the effect external forces have on macroeconomic determinants. For example, the financial market and economies of Europe were under substantial economic and financial stress that created a spillover effect for the United States economy. The process of recovery from the recession was hindered by policies implemented by the Federal Reserve like the confluence of tax increase and reduction in expenditure. Since the economic recession, the economic projections given by the Federal Reserve have been misleading managers.
Additionally, the monetary policies implemented by the Federal Reserve have been linked to devastating economic conditions. While the fundamental function of the Federal Reserve is to sustain a low inflation level, its policies have been associated with aggravating inflation. This situation does occur when the Federal Reserve created excessive flat money backed by nothing. This is part of the economic decision that the Federal Reserve makes in response to the projection given by the aggregate model. The overwrought budget for state and local government integrated with the potentially more obstructive federal policy negatively impacted the real GDP growth. All of the unprecedented outcome associated with the model and policies being implemented by the Federal Reserve shows how it is failing and it’s about time to introduce new policies and strategies to effectively maintain the best condition for the economic growth.
Recommendation
Since the Aggregate model for evaluating and projecting macroeconomic elements is failing in projection and implementation of effective economic policies, its right time that new measures are taken into consideration. One of those measures is for the government to proactively govern the operations and coordination of the Federal Reserve. It has been provided by the absolute power to control the monetary system of the county by creating the perfect and stable economic condition for growth, but over and over again it has failed. All of the financial and economic crisis since the great depression of 1930 to that of 2008, they have all been caused by the Federal Reserve (Marquez, 2019). Therefore, the government should have oversight on the decision being made by the Federal Reserve instead of letting it operate independently. Secondly, the Federal Reserve method of designing stress test scenarios should incorporate analysis of whether the current approach uses one simple economic scenario rather than several, which will be an effective way of assessing the resilience of the banking system (Scotti, 2018). Finely, the test models of risk management should focus on the risk associated with a model system that generates the stress test results.
Reference
Zhu, J. (2018). Federal Reserve Reform Act of 1977. Federalreservehistory. Org.
Walters-Marquez, J. (2019). Federal Reserve System. System.
Scotti, C. (2018). A bivariate model of Federal Reserve and ECB main policy rates. 26th issue (September 2011) of the International Journal of Central Banking.
Paul G. Farnham. (2014). Economics for Managers. P. 351.