Working Capital Management

In response to the recession starting in 2008, the Federal Reserve began a stimulus package that was called Quantitative Easing. The era of Quantitative Easing is now over, for now in the United States, but its effects will be debated for decades.
Fed policy makers announced that October 2014 would conclude their third round of using dollars to buy vast sums of bonds — $1.7 trillion in just the third round of the program, known across the land (or at least the financial world) as QE3.
The idea of increasing the money supply was to keep the economy moving closer to equilibrium in the aggregate and keep interest rates low to spur investment and lower unemployment. We have seen unemployment trend downward since the peak in 2010 and GDP growing in real terms since 2010. However, there are many thoughts as to the actions of the Fed on the overall economy in the long term; both positive and negative. In addition, the Fed has increased interest rates to tighten the money supply as unemployment has dipped below 4% and GDP is increasing at 2.9% in the 4th quarter of 2017 (read the press release from BEA by clicking here). You can see a history of the Fed Funds Rate by clicking here. The Fed has also started to reduce its balance sheet through its Balance Sheet Normalization process (click here for Fed Press Release). You can also see the trend of the Federal Reserve’s balance sheet by clicking here.

You are to develop an opinion on the Feds actions in the past to use unprecedented monetary policy (the buying of bonds by the Fed Open Market Committee) and to now stop the program and raise interest rates. Do you think the actions of the Fed were warranted during the recession? Were the actions too great or too little? What do you think will happen to the economy going forward (interest rates, unemployment, growth, Federal debt levels, etc.). Do you think it is time for the Fed to continue to increase interest rates and Balance Sheet Normalization?




Sample Solution