How the Federal Reserve Controls Inflation

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Table of Contents

Introduction
The Main Idea
Ways to Control Public Inflation Expectations
Personal Opinion
Conclusion
References

Introduction

Amadeo in the article ‘How the Federal Reserve Controls Inflation’ touches on an important topic: measures that which government takes to ensure a normal rate of inflation. Controlling inflation is an important measure to ensure the population’s welfare, which is the Federal Reserve’s primary goal. Avoiding recession while controlling prices is the optimal strategy for achieving the purpose. Inflation growth can be controlled in several ways: contracting the money supply and managing inflation expectations, controlling open market operations, and the federal funds rate (Amadeo, 2022). Despite the measures taken, the government cannot always keep inflation at the recommended level.

The Main Idea

The article’s author highlights a sensitive socio-economic topic: ways of government containment of inflation while preventing a recession. The main idea of the author of the article is that the state can effectively use non-obvious inflation control strategies more successfully than using traditional methods (Amadeo, 2022). Traditional methods include open market operations, federal funds, and discount rates (Amadeo, 2022). A non-obvious strategy, which the author considers more successful, is the management of inflationary expectations of the population. The author supports this point of view, citing the words of Ben Bernanke, who noted that public expectations could seriously affect the level of inflation (Amadeo, 2022). The fact is that people, expecting prices to rise, make an unjustified number of purchases, stocking up for future use, which causes inflation to rise. However, the article’s author does not disclose precisely how the state controls public expectations.

It is impossible to completely understand public financial strategies without analyzing the success of the pursued policies. The crisis of 2008 became a severe test for the entire world economy (Amadeo, 2022). According to the author of the article, the crisis became the impetus for developing new strategies for controlling the level of inflation (Amadeo, 2022). The main goal was to maintain banks’ solvency to maintain the population’s satisfactory financial condition. Another test was the 2020 pandemic; for some time, the state managed to contain inflation (Amadeo, 2022). However, not all actions were successful, and inflation began to set record levels in the future.

Ways to Control Public Inflation Expectations

Reducing inflation by controlling the inflationary expectations of buyers, investors, and producers is a reasonably new policy for which the evidence base is not very extensive. The study by Coibion et al. mentions that this policy may be effective, but more theoretical evidence needs to be developed (2020). The fact is that consumer expectations do not seem to be a stable value; respectively, it is difficult to control. The researchers propose to use this strategy in combination with techniques that have yet to be developed (Coibion et al., 2020). Further participation of researchers and collection of statistical data in the long term is needed.

Personal Opinion

It seems to me that the article’s author was quite convincing when talking about methods of inflation control. The author is convincing because she uses factual data on the success of public policy. The article presents all the main methods, which gives the reader a complete picture of the control measures. However, the author does not present a large amount of evidence base to justify the policy’s success in controlling inflationary expectations. According to other researchers, this strategy can be successful in the future (Coibion et al., 2020). Therefore, I think that the author is right in her conclusion that these methods can help control inflation.

Conclusion

Thus, Amadeo’s article provides readers with a detailed list of measures that the state uses to control inflation. The article is important to provide an understanding of how the state creates a stable economic environment. Controlling inflationary expectations can reduce price increases by removing panic buying behavior. However, the state does not always successfully use strategies, an example of this is the 2020 crisis. New measures or a combination of approaches are needed to ensure a stable environment.

References

Amadeo, K. (2022). How the Federal Reserve controls inflation: The way the fed uses its tools to manage prices. The Balance.

Coibion, O., Gorodnichenko, Y., Kumar, S., & Pedemonte, M. (2020). Inflation expectations as a policy tool?Journal of International Economics, 124(1), 1-25.

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How the Federal Reserve Controls Inflation

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