|Whither fiscal policy?
||[Jun. 28th, 2006|11:56 am]
The Question Club
Fed's delicate balance may be at tipping point
For many years now, the Federal Reserve has used monetary policy to balance inflation and economic growth, but this article is wondering if the continual boosting of interest rates is going too far.
When I took economics, I remember there being two major ways that the government could affect the economy - one being monetory policy (controlling the availability of money in the marketplace through interest rate adjustments), with the other being fiscal policy (adjusting federal spending to boost or slow the economy.)
Monetary policy seems to be simple in concept. The rate of economic growth moves the opposite direction of interest rates. Inflation a problem? Boost them a bit. Recession? Loosen the purse strings. It takes cautious adjustment of the rates to make this effective, but Greenspan seemed to have this down to a science (albeit the dismal one.)
Fiscal policy is also fundamentally simple. If the government spends more, the economy speeds up. Spend less, and it slows down. (Though the latter seems rarely used.) Deficit spending was used as a tool of fiscal policy, as in the New Deal. But increasing federal spending has an inherent inflationary effect, by injecting more money into the economy. Incurring deficits to fund that increased spending has the additional effect of creating upward pressure on interest rates, as the government borrows on the open market (by selling Treasury bills, notes and bonds) and has to pay interest on that borrowing.
It is beginning to seem that monetary policy is no longer able to readily hold inflation in check against the inflationary pressures of the federal deficit. The media talks about the Fed and interest rates, and mentions the deficit (and occasionally the national debt). But why is there no coverage of the effect that deficit spending has on the economy?
[And one more add-on question - do you find the above to be exceedingly nerdy?]