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MAIDEN LANE DIVISION: 2020 Case Study

Student’s Name

Professor’s Name

Institute Name

Date
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MAIDEN LANE DIVISION: 2020 Case Study

Introduction

The purpose of the term paper is to provide recommendations as a senior economist at the

Federal Reserve Bank of New York regarding the monetary policy for the upcoming Federal

Open Market Committee (FOMC), based on the economic data provided, and provide the

answers to economic indicators such as GDP, Labor Market, Inflation, Consumer Sentiment,

Housing Starts & Manufacturing data and Monetary policy along with the recommendations.

Gross Domestic Product (GDP)

Nominal GDP is a measure of the monetary value of services and goods, and it accesses

the economic production, and it includes the prices of services and goods in its calculations

(Thomas, 2022). However, the real GDP is a measure of the values of services and goods, which

is produced by an economy in a given year, and it is referred to as the “inflation corrected”, or

“constant price” GDP. Real GDP is calculated mathematically by the division of the GDP

deflator with the nominal GDP (Akhilesh, 2022). Moreover, the potential GDP is an estimation

of the value of the output produced in an economy, if capital and labor are developed at

sustainable rates (maximum). The difference between the potential GDP and real GDP is known

as the output gap. A positive output gap refers to a higher GDP potential, which means that

economic operation is above sustainable capacity (Tyler, 2021).

The overall state of the economy over the last three years is increasing according to chart

1 of the Nominal GDP. In Year 1, quarter 1, the value of GDP is 510.3 billion dollars while in

Year 3, quarter 3, the value of GDP is 580.6 billion dollars, which shows the gradual and

continuous increase in GDP, which specifies the advanced progress of the economy. The factors
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that are contributing to the pace of growth and level of the economy are net exports of goods &

services, personal consumption expenditures, and gross private domestic investments. Gross

private domestic investments increased from year 1 to year with the value of 341 to 378 billion

dollars according to Table 2. A similar economic pattern is observed in the table where exports

increased from 94 to 116 billion dollars, and imports increased from 129 to 142 billion dollars

for the three years. However, the change in Personal consumption expenditures is quite gradual

and comparatively to the other two factors. It is very important for the Federal Reserve Bank to

monitor the different components of GDP as GDP measures and track the overall health of a

country's economy. Investors can make better investment decision because of the trends in Gross

Private Domestic Investments, and components of GDP also provides the benchmark for the

Federal Reserve Bank regarding any recession in an economy (Leslie, 2022).

Labor Market

The data sets in the labor market provide the official unemployment rate, labor force

participation rate, the employment-population ratio, and initial claims for unemployment

insurance for three years for all twelve months. Charts and table for the labor force participation

rate show that the labor force participation rate is quite similar, and there is no strong peak in the

chart. However, the unemployment rate decreased from the first year to the end of the second

year, and after the second year, the unemployment rate increase gradually throughout the third

year of all twelve months. The main reason which is shown in the charts and table for entering

and exiting the labor market is the initial claims for unemployment insurance. In the first year of

the first month, initial claims for unemployment insurance are quite high with a value of 403, but

with a gradual decrease in the initial claims for the unemployment insurance, the unemployment

rate decreases in the second year.

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It is very important to measure these parameters as it provides the benchmarks for the

unemployment rate in an economy. The unemployment rate provides the benchmark for the

number of affected people & families in an economy, and it also shows the purchasing power

and provides sets of standards for employee morale. By comparing these measures, it is easy to

identify the factors that contribute to the unemployment rate in an economy, which in the given

scenario is the initial claims for unemployment insurance. Unemployment is the lagging

indicator as a higher the value of unemployment rate indicates a recession in an economy. By

understanding the trends in the unemployment rate, it is easy for economists to understand the

employment rate and layoffs that help to revise the policies to improve the employment rate in a

company (Elvis, 2022). When the Federal Reserve conducts the monetary policy, it influences

inflation and employment by the use of policy tools which has a direct influence on the cost and

availability of credit in an economy (Federal Reserve, 2022).

Inflation

The value of Personal Consumption expenditure (PCE) for Year 1 is 1.6 which gradually

decreases throughout the first year, and shows the maximum peak for year 2, month 4, with a

value of 2.1. However, the value of the Consumer Price Index (CPI), has a strong peak for the

value year 2, month 10 with a value of 0.7. It is very important to measure the headline and core

price index, as it measures the average change of prices, which is paid by the consumers over a

specific period for services and goods, and it is the most important factor for the measurement of

inflation in an economy (Jason, 2022).

The current inflation rate according to Table 6 is 1.0 based on the percentage change in

the real core PCE. It is expected to change because the fact charts for PCE show the continuous

change in the value of PCE, and there is a continuous change in the PCE. The factors that affect
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the price levels are the real GDP, natural resources, and the level of production of sales in an

economy (David, 2022). The CPI and PCE factors are different from each other because PCE

measures the change in services and goods consumed by the people while CPI measures the

change in expenditures by the people. Both are important in making the monetary policy

decision, however, CPI is used by the federal government to make inflation adjustments while

PCE is used during the economic projections (James, 2013). The Fed's target inflation rate is 2

percent (Jamie, 2022).

Consumer Sentiments

The consumer sentiment is represented in table 5, which has a value of 95.3 for year 1,

and quarter 2 while the consumer sentiment index has a value of 93.0 for a year, and quarter 4.

The current household outlook is 93.0 based on the total household outlook of 100.0. The

increase in the value of consumer spending helps the economy to sustain the expansion, and

when the value of consumer confidence becomes lower, consumers become less conscious and

certain about their financial prospects. It is a leading economic indicator, as it measures the

overall health of the country’s economy, and it is a great parameter to measure the economic

trends as it is a quantitative measure of consumer confidence and the value of confidence shows

the financial prospects, and consumer behavior patterns regarding spending money (Peter, 2022).

Housing Starts and Manufacturing Data

The number of the housing units for the year 1, month 1 is 1,657 thousand units, which

gradually decreases in the thousands of units, up to year 3, month 4, then it starts to increase with

1,415 thousand units for year 3, month 10. Houses are considered to be normal good that has a

high-income elasticity of demand, and it triggers the largest percentage change increase in
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demand. The demand curve for housing moves in the right direction when there is an income

increase in an economy. Other factors that influence the direction of an economy are social &

lifestyle trends and interest rates (Economics, 2020). Manufacturing capacity utilization data

highlights the degree to which the organization can reach its full potential, and capacity

utilization is much more relevant in an economy where physical products are manufactured

(Will, 2022). Both housing and manufacturing capacity is a leading indicators, and the higher

value of manufacturing capacity and privately owned housing units help the economist to

understand the economic trends in an economy.

Monetary Policy

The effective fund's rate is increased from the year 1, quarter 1 with a value of 2.58 to

3.70 for the year 2, quarter 2. However, for the year 2, quarter 3, the effective fund's rate

decreased from the value of 2.94 to 2.40. Change in the federal funds rate has a direct influence

on the change of interest rates. When the Federal Reserve increases the fund's rate, it will

increase the money supply that increases the interest rate, which puts more money and

investment in the consumer’s hands. Therefore, it is recommended that Federal Funds rates

should be decreased. When the federal funds are lowered, it will increase the expansionary

monetary policy, which helps to strengthen the economy. The recommendation to lower the

Federal Funds rate helps to deal with inflation issues in the economy, the balance between

money supply and demand, and helps the Feds in making better decisions for buying and selling

U.S Treasury Securities, which helps the Feds to achieve the desired goals in monetary policies

(Troy, 2022).
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References

Thomas Brock (2022). Investopedia. Nominal Gross Domestic Product.

https://www.investopedia.com/terms/n/nominalgdp.asp

Tyler Powell (2021). Brookings. What is potential GDP, and why is it so controversial

right now?

https://www.brookings.edu/blog/up-front/2021/02/22/what-is-potential-gdp-and-why-is-

it-so-controversial-right-now/

Akhilesh Ganti (2022). Investopedia. Real Gross Domestic Product

https://www.investopedia.com/terms/r/realgdp.asp

Leslie Kramer (2022). Investopedia. What Is GDP and Why Is It So Important to

Economists and Investors?

https://www.investopedia.com/ask/answers/what-is-gdp-why-its-important-to-

economists-investors/

Elvis Picardo (2022). Investopedia. How the Unemployment Rate Affects Everybody

https://www.investopedia.com/articles/economics/10/unemployment-rate-get-real.asp

Federal Reserve (2022). How does the Federal Reserve affect inflation and employment?

https://www.federalreserve.gov/faqs/money_12856.htm

David Harper (2022). Investopedia. Forces That Move Stock Prices

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https://www.investopedia.com/articles/basics/04/100804.asp

Jason Fernando (2022). Investopedia. Consumer Price Index (CPI)

https://www.investopedia.com/terms/c/consumerpriceindex.asp#:~:text=It%20measures

%20the%20average%20change,the%20Bureau%20of%20Labor%20Statistics.

Jamie McGeever (2022). Reuters. Column: Fed's inflation target ambiguity risks market

misstep

https://www.reuters.com/business/finance/feds-inflation-target-ambiguity-risks-market-

misstep-2022-06-30/#:~:text=Since%20January%202012%2C%20the%20Fed's,index%20for

%20personal%20consumption%20expenditures.%22

James Bullard (2013). Federal Reserve Bank of St. Louis. President's Message: CPI vs.

PCE Inflation: Choosing a Standard Measure

https://www.stlouisfed.org/publications/regional-economist/july-2013/cpi-vs-pce-

inflation--choosing-a-standard-measure#:~:text=For%20example%2C%20the%20federal

%20government,in%20terms%20of%20headline%20PCE.

Peter Bondarenko (2022). Britannica. Consumer Confidence.

https://www.britannica.com/topic/price-index

Economics Online (2020). The Housing Market

https://www.economicsonline.co.uk/competitive_markets/the_housing_market.html/

#:~:text=As%20houses%20are%20normal%20goods,homes%2C%20or%20to%20rent%20out.
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Will Kenton (2022). Investopedia. Capacity Utilization Rate

https://www.investopedia.com/terms/c/capacityutilizationrate.asp

Troy Segal (2022). Investopedia. What Does a Low Federal Funds Rate Mean?

https://www.investopedia.com/ask/answers/032715/what-are-implications-low-federal-

funds-rate.asp