The question is: How much are Americans willing to pay for some manufacturing jobs to return to the U.S.? For manufacturing jobs to return to the U.S., three factors need to be present: 1) capacity - firms need to have the property, plant, equipment, people, and necessary inputs to domestically manufacture currently outsourced products, 2) capability – firms must possess the technological ability, and 3) an acceptance by Americans of higher prices. A mix of manufacturing and foreign sourcing can provide lower costs to manufacturers and lower prices to consumers. Firms can benefit from economies of scale and lower costs by focusing on manufacturing certain products and components while others are outsourced. Research and development can also be more focused. Resources, including labor, are limited. Manufacturing strategically important products is important for U.S. economic growth and minimizing the impact of any future supply chain disruptions. However, attempting to manufacture all products used by consumers and businesses would raise costs to businesses and lower the standard of living for consumers through increased prices. The Federal Reserve and Interest Rates The Federal Reserve is responsible for monetary policy – implemented primarily through targeting the federal (fed) funds rate by controlling the money supply. The fed funds rate is the overnight borrowing rate between banks, a very short-term interest rate that when changed, typically has a rippling effect through the financial markets. The Federal Reserve influences this rate by primarily controlling the money supply in the United States. The amount of money circulating in the economy has an impact on interest rates and credit conditions - more money, lower interest rates; less money, higher interest rates. The fed funds rate is increased when the Federal Reserve decreases the money supply by selling Treasury securities (technically called Open Market Operations). The fed funds rate is decreased when the Federal Reserve increases the money supply by buying Treasury securities. Changes in the fed funds rate generally affect savings and borrowing rates. The Federal Reserve Reform Act of 1977 requires the Fed to direct its policies toward the dual mandate of achieving maximum employment and price stability and report regularly to Congress. The Federal Reserve has a specific definition for price stability, and seeks to achieve inflation at a 2% rate over the long-run as measured by the annual change in the Personal Consumption Expenditures (PCE) price index. When making monetary policy and interest rate decisions, the Federal Reserve focuses on price changes using the PCE index rather than the Consumer Price Index (CPI). Both indexes calculate the price level by pricing a basket of goods. The basket of goods for the two measures is slightly different, and the index weighting of goods is also slightly different. While the two are similar, the PCE index reflects how Americans are currently spending their money to a greater degree and more quickly adapts to changes in spending patterns. The other part of the Federal Reserve’s dual mandate, achieving maximum employment, is more difficult to define. However, it became clear in the latter stages of the economic recovery in the last decade that an unemployment rate hovering around 3.5% could be sustained without leading to excessive inflation. In reality, it has been very difficult in recent history to move the unemployment rate below 3.5%, as there will always be a mismatch to some degree between the abilities of people looking for work and the skills required for available jobs. Since 1970, only one month had an unemployment rate below 3.5% - April 2023, at 3.4%. In striving to achieve its dual mandate, the Federal Reserve acts in a nonpartisan, independent manner to balance economic growth (which affects employment) with inflation. The goals are met through the application of monetary policy, generally through changes in interest rates. Lower interest rates can increase consumer and business spending which fuels economic growth and boosts employment. However, too much economic growth, or economic growth when the economy is near full employment, can increase inflation. Higher interest rates can lower economic growth by reducing interest rate sensitive consumer and business spending, which generally lowers the demand for products and services and consequently inflation. Pushing interest rates too high, however, could plunge the economy into a recession. It’s a balancing act for the Federal Reserve, setting interest rates neither too low nor too high, but at a level that promotes economic growth (and full employment) and price stability in the long-run. Setting the appropriate level for interest rates is particularly challenging when the Federal Reserve is trying to lower inflation when there are factors contributing to inflation that are largely outside of the Federal Reserve’s control.
Central Wisconsin Report - Spring 2025
7
Made with FlippingBook Learn more on our blog