Western Kentucky University

Poster Title

Are We Fed Economic Uncertainty?

Institution

Western Kentucky University

Abstract

The Federal Reserve (Fed) uses monetary policy in an effort to produce stable prices, employment, and economic growth. To do so, we believe the Fed needs to foster certainty about its policy actions. Using the Daily News-based Economic Policy Uncertainty Index (DNEPUI) from www.policyuncertainty.com, one can see many occasions of surges in economic uncertainty. While the Fed certainly isn't the only source of uncertainty in the economy, their leading role in setting policy that affects the world's largest economy merits investigation. Recently there have been two main methods of conducting monetary policy: 1) the use of "rules," or systematic methods which determine their course of action (e.g. the Taylor Rule), and 2) discretionary action, which means acting in the best interest of the present situation (e.g. the latest rounds of “quantitative easing”). Since 1985 both have been implemented at various times. It seems recent surges in economic uncertainty are partially related to the Fed’s discretionary policy actions. By going through the various rules and discretionary policy times to see what policies were implemented and why, correlation between policy and uncertainty may be detected. Changes in variation in the uncertainty index before and after the most recent recession illustrate how much more uncertainty fluctuated during recent times. If uncertainty in policy hampers growth, then there is something fundamentally flawed with policy. Discerning if the Fed has failed at creating economic growth by increasing uncertainty instead will broaden the macroeconomic perspective of analyzing monetary policy, as well as, inform citizens and businesses how they can use reports of Fed policy in their labor and investment decisions. That is why it was useful to determine which monetary policies of the Fed increase the overall level of uncertainty in the economy.

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Are We Fed Economic Uncertainty?

The Federal Reserve (Fed) uses monetary policy in an effort to produce stable prices, employment, and economic growth. To do so, we believe the Fed needs to foster certainty about its policy actions. Using the Daily News-based Economic Policy Uncertainty Index (DNEPUI) from www.policyuncertainty.com, one can see many occasions of surges in economic uncertainty. While the Fed certainly isn't the only source of uncertainty in the economy, their leading role in setting policy that affects the world's largest economy merits investigation. Recently there have been two main methods of conducting monetary policy: 1) the use of "rules," or systematic methods which determine their course of action (e.g. the Taylor Rule), and 2) discretionary action, which means acting in the best interest of the present situation (e.g. the latest rounds of “quantitative easing”). Since 1985 both have been implemented at various times. It seems recent surges in economic uncertainty are partially related to the Fed’s discretionary policy actions. By going through the various rules and discretionary policy times to see what policies were implemented and why, correlation between policy and uncertainty may be detected. Changes in variation in the uncertainty index before and after the most recent recession illustrate how much more uncertainty fluctuated during recent times. If uncertainty in policy hampers growth, then there is something fundamentally flawed with policy. Discerning if the Fed has failed at creating economic growth by increasing uncertainty instead will broaden the macroeconomic perspective of analyzing monetary policy, as well as, inform citizens and businesses how they can use reports of Fed policy in their labor and investment decisions. That is why it was useful to determine which monetary policies of the Fed increase the overall level of uncertainty in the economy.