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Monetary Policy: Is the Dual Mandate of the Fed Maximizing the Social Welfare?

Author

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  • Dr. Ioannis N. Kallianiotis*

    (Economics/Finance Department)

  • J. Kania

    (School of Management University of Scranton Scranton, PA)

Abstract

In this work we deal mostly with the recent (2008-present) Federal Reserve operated monetary policies, which are two unprecedented and distinct monetary policy regimes. The Zero Interest Rate Regime (2008:12-2015:11) and the New Regime (2015:12-2018:12). These different monetary policy regimes provided various outcomes for inflation, interest rates, financial markets, personal consumption, personal savings, real economic growth, and social welfare. Some of the important results are that monetary policy appears to be able to affect long-term real interest rates, risk, the prices of the financial assets, and very little the real personal consumption, personal savings, and the real economic growth during the recent period of extreme monetary policy, in which the Fed held short-term interest rates abnormally low for an extended period (2008-2015) and the present time, which keeps the federal funds rate below the inflation rate. The Fed’s interest rate target was set during those seven years at 0% to 0.25%. On December 16, 2015, the Fed started increasing the target rate by 25 basis points approximately in each FOMC meeting, from 0.25% to 0.50% to 0.75%, and presently to 2.50%. We want to explain the low level of long-term interest rates and the real rate of interest (cost of capital) in the economy. The evidence suggests that it is the Fed the main cause of the low (negative) real interest rate following the 2007-2008 financial crisis. This monetary policy was not very effective (the zero interest rate target of the Fed). It has created a new bubble in the financial market, future inflation, and a redistribution of wealth from risk-averse savers to banks and risk-taker speculators. In addition, it has increased the risk (RP) by making the real risk-free rate of interest negative. The effects on growth, prices, and employment were gradual and very small, due to outsourcing and unfair trade policies, which have affected negatively the social welfare. The dual mandate (price stability and maximum employment) of the Fed is not sufficient to maximize the social welfare of the country.

Suggested Citation

  • Dr. Ioannis N. Kallianiotis* & J. Kania, 2019. "Monetary Policy: Is the Dual Mandate of the Fed Maximizing the Social Welfare?," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 5(6), pages 112-142, 06-2019.
    • Handle: RePEc:arp:ijefrr:2019:p:112-142
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    References listed on IDEAS

    as
    1. William T. Gavin & Finn E. Kydland, 1999. "Endogenous Money Supply and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 347-369, April.
    2. William T. Gavin, 2018. "Monetary Policy Regimes and the Real Interest Rate," Review, Federal Reserve Bank of St. Louis, vol. 100(2), pages 151-169.
    3. John N. Kallianiotis, 2013. "Exchange Rates and International Financial Economics," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-137-31888-6, October.
    4. Brett W. Fawley & Christopher J. Neely, 2013. "Four stories of quantitative easing," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 51-88.
    5. Lawrence H. Summers, 2016. "Secular Stagnation and Monetary Policy," Review, Federal Reserve Bank of St. Louis, vol. 98(2).
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    Cited by:

    1. Ioannis N. Kallianiotis, 2021. "Monetary Policy Rules vs Discretion: Social Cost and Benefits," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 11(5), pages 1-6.
    2. Ioannis N. Kallianiotis, 2021. "Exchange Rate Determination: The Portfolio-Balance Approach," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 11(1), pages 1-2.

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