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?

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