The Firm and the Macroeconomy: The Federal Reserve's Next Monetary Policy Meeting Recommendation

Memo briefing the Chairman of the Federal Reserve on the current state of the labor market and the current and near-future inflation prospects.Your memo will provide advice to the Chairman for the next Federal Open Market Committee (FOMC) meeting.

The objective is to apply your learning to the analysis and assessment of US monetary policy, which has widespread implications for the national and international business environment.

Resources - Okun's Law, Inflation, Unemployment, and the Phillips Curve.

1.Assuming the Federal Reserve targets a 2 percent inflation rate and a 4 percent natural unemployment rate over a one-year period, discuss the economy's current alignment to those targets.Data on US inflation and unemployment may be obtained from the Bureau of Labor Statistics or the Federal Reserve Bank of St. Louis.Links to these to resources are available in Blackboard.

2.Forecast inflation and unemployment one year ahead, making an assumption about next year's real GDP growth rate and using Okun's law and the Phillips curve.You may assume a b coefficient of 1, that expected inflation is equal to actual inflation, and a negative supply shock v=0.5%. Provide an interpretation of the supply shock based on current events in the news. Make sure you justify your assumption of the real GDP growth rate, either documenting precisely its source or explaining your reasoning.

3.Draw at least one chart or a table showing the inflation and GDP forecasts you made and talk about your results.

4.Formulate a recommendation for the next FOMC meeting. Your recommendation should answer the following questions:Should the Fed raise interest rates, lower them, or leave them unchanged? Why? If you recommend changing interest rates, by a little or a lot, and why? If you recommended leaving them unchanged, for how long (for a short while or for a long time).