Free «Reaction Paper» UK Essay Paper
The monetary policy usually includes the necessary steps and platforms on how to deal with the issues affecting the economy regarding the factors ailing it financially. The article that is going to be discussed here is published in The Wall Street Journal (Light, 2016). The authors are Dan Strumpf and Joe Light talking about the impacts of the low-interest rates as well as explaining how the necessary interest rate is to be tackled and addressed in a very convenient way.
Definition of the Issue
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As a matter of fact, the article entails the problems of the low-interest rates which can cause a delay for the investors and in the economy as a whole. It dwells on the likelihood of the interest rates being low thus substantially damaging the economy. However, the Central Bank is yet to acknowledge the issues and perform its role regarding these questions. To explain, the interest rates are clearly defined as the amount of money charged on loans to lenders by the banks (Light, 2016). Actually, Keynes stated that interest rates have no connection with the facts related to savings and investment issues.
Argument and Assumptions
Notably, due to the article under consideration, the entire economic growth is based on the constant economy stabilization, and the existent factors of the variables disturb the Federal Reserves to a great extent. Namely, one of them relates to the available jobs and the way the rates of employment are addressed as well as the alarming inflation rates being rather high.
The Federal Reserves are going to project the rates similarly to the interest rates of the previous years. Markedly, such projections are the ones being elaborated by the executives. For instance, in September it was projected to be 1.375% at the end of the 2016 period and 2.625% at the end of 2017 so the projections for the end of 2018 are estimated to be 3.375% (Light, 2016). The executives expected an increase in the foreign exchange rates next year in September calculated in the quarter percentage points,5 % in 2017 and 3 % in 2018 (Light, 2016). Such estimations aimed at ensuring that the Federal Rates would precisely know what the rates are about and approximately which fluctuation to expect. Nonetheless, if the inflation rates come below their assessments, the Federal Reserve can, consequently, shut their projections and create the new ones which would move more progressively.
Support of the Argument
The argument is supported through the fact that the interest rates have the impact on the economy regarding the profitability towards the banks which are thoroughly affected. Important to realize is that higher interest rates are usually connected with the rates at which maximum profits are achieved. Accordingly, the banks and the way the stock markets function are influenced (Light, 2016). Therefore, the article states that the low rates noticeably alter the profit levels so that they are reduced hence extracting a negative impact. The macroeconomic model gives the definition of the notion of the interest rates as the adaptive monetary policies providing the rational expectations. Another key point is that the classical macroeconomics addresses the issue of the demand side and the quantity side of the subject under scrutiny which is the money undersupply (Light, 2016). Significantly, the study of the markets as a way of establishing efficiency in the field of monetary policy controls how the various stakeholders can act in times of any financial crises.
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Assumptions, Strengths, and Weaknesses
The assumptions made in the seed article are reasonable. Acknowledging that banks and other stock markets are not profitable determines the way these institutions run. Moreover, the core aspect regarding the fact that the interest rates have changed the money market is definitely foreseeable. Undoubtedly, low profits are the outcomes of the low-interest rates.
The seed article was able to mention the financial rates of the banks regarding the percentage index. In particular, the values therein enabled the readers to gain an insight on what to expect before heading to any bank without the inndices in mind. What is more, it mentioned the 10-year Treasury note that had changed over the recent period ranging from the mortgage rates to the corporate borrowings (Light, 2016). The article has also mentioned the Federal Reserve gathering in December in order to address the issues on the rates projections. Besides, the impacts of the low-interest rates on the mortgages borrowers and automobile developers were considered too. The interest rates were continuously under scrutiny equally by all the investors.
Notwithstanding that, according to the macroeconomic model the seed article failed to cover such subjects:
- Adaptive expectations
- Rational expectations
- Demand side based on the quantity theory of interest rates
- Keynesian model
- Neoclassical formulation
- Dynamic state of the market regarding the prospects
Policy Recommendation to the Problem
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The Federal Reserve should be able to adopt the model of anti-quantitative ease. To clarify, the model helps to assure that the gains of the government securities held by the Central Bank are exchanged due to the right amount of money people own. Over and above, the design assists in decreasing the quantity of public money and, subsequently, transforms the interest rates returns into stable ones. The design also diminishes both the liquidity and the borrowing power. In general, the Central Bank utilizes the government bonds either by lowering or augmenting the rates. It goes without saying that the recommendation given by the article is of a great help. The tightening of the loans and borrowing power needs to be stiffened and focused on the incapability of the borrowers to access more money. Obviously, the solution of the problem lies in stabilizing of the interest rates.
To conclude, the way the rates are handled and the way the policy is to be tackled requires a profound analysis. Specifically, the government needs to implement a monetary as well as a fiscal policy that would proficiently manage and control the interest rates.
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