Macroeconomic Situation the Development Policy Essay

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If the Fed is more concerned with the core CPI, then rates are unlikely to be raised this year. An increase in rates would slow the economy down. However, if total CPI increases at a faster rate, this could force the Fed to raise rates slightly.

On the whole, however, the data does not support DESA's pessimism about the state of the American economy. The Federal Reserve is currently using expansionary monetary policy to keep the amount of money in the economy at a high level, to spur business investment and real estate markets. In addition, lower rates make it easier for consumers to re-adjust their balance sheets as well. While the data about the U.S. economy is encouraging -- most key measures are trending up, with solid underlying support rather than as the result of short-term trends -- the U.S. economy is not growing so fast that contractionary monetary policy is necessary.

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The DESA report argued that contractionary fiscal policy is a risk as well, and this may well be the case in an election year, but there is little likelihood that any strong austerity measures would be passed this year either. A continuation of the status quo until after the election is the most likely outcome. Thus, I believe that DESA overstates the downside risk of the U.S. economy. The economy is likely to continue its current path of relatively slow recovery for the coming year.

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