you are required to prepare a 4-5 page (double-spaced, typewritten) assessment of current U.S. macroeconomic conditions and a recommendation regarding the appropriate path for Federal Reserve monetary policy over the next 6-12 months.

Background:  In response to the Great Recession (Dec. 2007 – June 2009) and the U.S. economy’s generally weak recovery in the immediately ensuing years, the Federal Reserve (Fed) used its monetary policy tools (particularly a variant of open market operations known as quantitative easing) to help push interest rates down to their lowest levels in decades.  The interest rate receiving the most public attention has been the federal funds rate which has hovered in the 0-0.25% range for several years, leading pundits to say that the Fed has “pushed interest rates down to zero.”  Those low rates are intended to stimulate business investment spending and the U.S. housing market, enabling GDP to grow faster and create more jobs, thereby lowering unemployment and raising incomes.

Since the economy has strengthened (to some degree) over the past couple of years and the unemployment rate has fallen substantially, there has been increasing sentiment among some (but not necessarily most) economists and financial market participants for the Fed to take action that would cause interest rates to rise at least modestly.

Assignment:  Your general task is: (1) to assess current and prospective U.S. macroeconomic conditions (how weak/strong is the U.S. economy at present and what’s the general outlook for the next several months/year); and (2) indicate whether or not you feel the Fed should maintain the federal funds rate target at its current rock-bottom level or begin to raise it.

Successful completion of this assignment requires that you:

(1) document the behavior of key U.S. macroeconomic variables (e.g., rates of inflation, unemployment, and economic growth; interest-rate levels) in recent years, i.e., 2013-present; and

(2) explain the macroeconomic basis for your monetary policy recommendation.  If you feel the Fed should raises its federal funds rate target, explain why.  Also indicate when you feel the Fed should begin raising interest rates and the approximate level to which the federal funds rate target should rise over the course of the following year. Also consider the macroeconomic risks associated with your policy recommendation.  Could it wind up hurting the economy’s performance (in terms of the key U.S. macro variables mentioned above)?

In contrast, if you feel the Fed should not raise its federal funds rate target soon, explain the basis for your position.  What are the macroeconomic risks of not raising interest rates?  Also under what macroeconomic circumstances would you recommend a higher federal funds rate target?

Finally, be sure to indicate clearly why you feel your policy recommendation is the best path for the Fed to take.

Researching Your Topic

Your presentation must be based on at least five bibliographic sources.  Articles appearing in the popular or business press such as Forbes, Fortune, The Economist, and Bloomberg Business Week, among others, are appropriate, as well as credible web sites and blogs.  As for newspapers, the New York Times, Washington Post, and Wall Street Journal provide the most extensive coverage of the Federal Reserve and its monetary policy actions. All of these titles are available in Pfau Library, either electronically or hard copy (or both).  In addition, each of the 12 Federal Reserve Banks has a web site as does the Federal Reserve Board of Governors (federalreserve.gov).  The latter site includes much information about the Federal Reserve’s Federal Open Market Committee (FOMC) which meets every six or seven weeks in Washington, D.C. to discuss macroeconomic conditions and determine the path of monetary policy over both the months ahead and the longer term.  Those FOMC meetings receive widespread media attention.  [For general background on the FOMC, you may want to consult pp. 330-335 of your textbook or, on the course reading list in your syllabus, Duke’s “Come with Me to the FOMC” or pp. 324-328 of Croushore’s Chapter 15.  Or follow the “Monetary Policy” link at federalreserve.gov to “Federal Open Market Committee.”]

note: Web access to some magazines/periodicals is available only to paid subscribers.  Pfau Library has paid subscriptions to many online sources.  So, if you’re checking sources such as those listed above, you may find checking them online through Pfau Library (lib.csusb.edu) more fruitful than trying to access them directly on the Web.

In your paper be sure to provide appropriate recognition of bibliographic sources (see “Reference Format” at the end of this document).  If you quote a source directly, verbatim or with minor changes, without enclosing the material in quotation marks, you are passing off someone else’s work as your own and are guilty of plagiarism.  Further, even if you put another author’s idea into your own words, it is necessary to reference your source of information.  Use source materials responsibly.  Plagiarized papers result in a failing grade for the course.

Audience

Approach the assignment as if you have been asked by a friend to explain your topic in a thorough, common sense manner.  Assume your friend is familiar with both basic economic terminology and the general methods used by the Federal Reserve to implement monetary policy.

Criteria for Grading

1. organization –  state your plan for the paper at the outset, then follow through on it.

2. ability to analyze (vs. merely describing) the Fed’s monetary policies.

3. credibility – support your monetary policy views with economic logic and the informed opinion of economic analysts. Don’t base your views on “gut feelings” unless you can back them up with credible evidence.

4. clarity –  while use of economic terminology is desirable, make sure your friend follows

your logic.  Put your monetary policy impressions into your own words instead of relying excessively on financial press jargon.

5. spelling/grammar/writing.  Spelling and grammatical errors, as well as awkward sentence construction, distract the reader from the main points you are trying to communicate and reduce the effectiveness of your paper (and your grade).  Edit your work carefully to ensure that your ideas and major points are clearly stated.

6. proper documentation of sources (see below).

Reference Format

Instead of using footnotes in your paper, list sources alphabetically in a section entitled “References” at the end of the paper, and number them sequentially.  Here are some sample entries:

(1) Maria Anders, “The Fed Plans to Raise Interest Rates,” Fortune, June 13, 2006, pp. 12-16.

(2) Milton Friedman and Anna Schwartz.  A Monetary History of the United States (Chicago:  University of Chicago Press, 1963).

(3) Gregory Mankiw, “Aggregate Supply and Sticky Nominal Wages,” Quarterly Journal of Economics, April 1996, pp. 235-258.

(4) Crystal Patterson, “The Federal Reserve Is in Need of Reform,” Wall Street Journal, August 12, 2009, p. 22.

(5) Carl Stokes, “The Strategy of Monetary Policy,” Regional Focus, November 8, 2010, (accessed @ fedwatch.com, 5-26-13).

The first of these is the required reference format for popular-press magazine articles.  The second shows the format for book references; the third and fourth for academic journal articles and newspaper articles, respectively.  (Magazine, journal, and newspaper article formats are essentially the same.)  Online citations are similar but must include web site address and date of access, as in (5).

Say, in the body of your paper, you quote p. 242 of Mankiw’s article.  Your reference should immediately follow the quotation, as below:

“… sticky nominal wages raised the unemployment rate about one percentage point annually during the 1980s.” (3, p. 242)

In the citations above also note that titles of magazines, academic journals, newspapers, and books are not enclosed in quotation marks.  Instead they are italicized (as above), underlined, or typed in bold print.  Titles of articles appearing in those publications, in contrast, should be enclosed in quotations marks.

You may use a different referencing/citation system (such as APA, MLA, Univ. of Chicago) if you confirm that arrangement with me.  Otherwise use the one presented above.