Monetary Policy While the Economy Term Paper

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If energy prices rise further, it is likely that private spending will be influenced and economic expansion may be negatively affected. The high and volatile prices of crude oil and natural gas appear troublesome for future predictions (Greenspan, 2005).

Another uncertain factor affecting the economy is productivity, which is delineated in unit labor costs, or the hourly labor compensation to output per hour ratio. An increase in productivity over the last decade has favorably influenced the United States' economy, in that efficiency gains restrained inflation. The concern is however that this rapid growth in productivity cannot be maintained. This inherent uncertainty is substantiated by the fact that output per hour, that reached its peak in 2003, seems to be declining. This may result in recession trends, although the duration of the productivity decline is uncertain. A related concern is the sharp decline of output measured from the product side of national accounts, although output as measured from the income side has not slowed as drastically. It is not clear how serious this is for the determination of future recession trends, as more information is necessary to determine this (Greenspan, 2005).

There are several factors influencing current monetary policy. While the general economic trends have been favorable for much of 2005, there are also negative factors such as oil and gas prices, as well as the state of terrorism that have to be considered.

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Anti-globalization and protectionist initiatives could also pose a threat to the global economy. The flexibility of the American monetary policy is affected by the above initiatives, and would substantially decrease the ability of the United States to absorb shocks in an economically viable way. The flexibility and openness for which the U.S. market is known is attributed largely to the bipartisan effort to reduce regulation and promote openness (Greenspan, 2005).

The way forward would then be to carefully preserve the openness that has been cultivated over the years. This will ensure a continued and constructive growth in the economy, even if uncertainties, recession and inflation affect the market somewhat negatively. The policy then remains that policy accommodation can be removed at a measurable pace, although economic changes can be responded to in order to maintain stability (Greenspan, 2005).

Monetary policy has thus remained unchanged during 2005, as shown by most foreign economies. The European Central Bank for example shows a constant policy rate since June 2003. The Federal Reserve is then supportive of this trend, as the monetary policy remains largely unchanged as a result of the relatively stable economy.

Although certain uncertainty factors do exist, the general trend is fairly stable, without major threats of either recession or inflation.

Source

Greenspan, Alan. (2005). "FRB: Testimony, Greenspan --….....

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