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Federal Reserve and the Economic Bubble On Tuesday November 16 1999 the Federal Reserve Board will decide whether or not to tighten monetary policy at the Federal Open Market Committee meeting Throughout the year the Fed has been somewhat hesitant to raise rates which could slow the economy While raising the Federal Funds and Discount Rates could in the long run lead to higher interest rates many people worry that the potential for an overheated economy is high and there is little risk from too slow growth Overheating in the economy popularly known as the economic bubble could reverse the current decline in inflation Therefore action should be taken to prevent such a thing from happening The purpose of monetary policy is to stabilize prices and make sure that economy is operating at full potential stabilize employment and production Data proves that both have been fulfilled Price inflation is low at 2 and unemployment is close to 4 Bureau of Economic Analysis and Bureau of Labor Statistics This low rate of unemployment however can be a problem for many businesses because it can make finding qualified labor difficult So which move can be considered the most appropriate I feel that the best action is to tighten monetary policy The economy is growing at a rate above its potential as a result of high consumer spending which is driven by swelling stock prices Households and businesses are borrowing more and saving less According to the Bureau of Labor Statistics there has been a steady decline in the unemployment and underemployment rates The underemployed includes the unemployed discouraged workers and those working part-time that desire to work full-time This aids in the 4 real GDP growth While this may seem attractive it is not desirable in an economy that is overheating such as ours With the phenomenon of low unemployment comes high labor costs Businesses spend large amounts of resources in hiring labor retention
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