Article Review
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Article Review
The article notes the effects of the monetary policy taken by the government, which included massive buying of bonds. The government’s decision to purchase the bonds is intended to reduce the borrowing costs and increase investment. It also hopes that such measures will increase employment levels in the country. The authors note that this has had the effect of increasing the balance sheet to $4 trillion. The government recently reduced its bond buying frequency and this was a positive step as it reduced the domestic and international risk. The government has reduced the monthly bond purchases to $65 billion. It hopes to continue with this trend and it has not been persuaded to do otherwise by the recent economic turmoil in the emerging markets. The article notes that other than the bond purchases, the government has maintained a benchmark interest rate of near zero for more than five years. The current unemployment rate stands at 6.7%. The government will continue maintaining the current interest rates until this rate reduces to 6.5% and so long as the levels of inflation remain in check.
The monetary decision taken by the government can increase financial risk in future. Already some banks have already begun taking measures that will have a negative effect on the long-term financial stability. Some of the changes expected because of the government’s unprecedented decision will cause an increase in the stock prices and they might lead to an asset bubble. The decision taken by the Federal Reserve will not only destabilize the economy in the country but it will also affect other countries as well. It will affect the stock exchange rates, capital flows, balance of payment positions, and rates of credit expansion. The article considers the government’s decision to purchase the bonds an easy monetary policy. It suggests that this can be rectified by implementing a higher leverage ratio, having restrictions that limit proprietary trading and more supervision of banks to prevent any emerging problems.
Reference:
Saphir, A., Nomiyama, C., & Dalgeish, J. (2014). Fed’s George warns of risks from super-easy monetary policy. Retrieved from http://www.reuters.com/article/2014/01/31/us-usa-fed-george-idUSBREA0U14L20140131