Fiscal and Monetary Policy Simulation and Recommendation, Essay Example

The Federal Reserve System (Fed) sets future goals for the monetary policy of the country. The latest update of the long term goals of the Monetary Policy Strategy were published on the 29^th of January, 2013. The main principles are maximum employment and the inflation reduction. (FOMC 2013). The recommendations include increasing the clarity of monetary decisions to help businesses and households plan ahead. The report of the latest meeting in May 2013 (FOMC1 2013,) has assumed that the main contributors towards inflation were food and energy prices, and the yearly increase of price in energy supply was predicted to stay the same it was in the previous few years.

According to Rosa (2013), there are three main surprises in the Federal Monetary Policy affecting the future of the energy market. These are:

a, “A Target shock is defined as the difference between the announced target federal funds rate and market participants’ expectations”

b, “A Path shock captures revisions to the future path of monetary policy”

c, “An asset purchase shock measures the surprise component of asset purchase announcements”

(Rosa, 2013, pp. 5.)

Based on the new Federal Reserve Policy, the flexibility of the size of the monthly bond-buying program is a new approach that needs to be considered. Based on the predictions and the state of the economy, the long-term asset purchases would be planned in order to stimulate the economy.

Adjustments of Strategic Decision-making in the Energy Sector

As the government is focusing in increasing employment rate and balancing the economy, planning on the increase of energy prices at a 2 percent inflation rate, the main strategic adjustment an energy company needs to make is to keep the profitability of production and supply within the 2 percent increase margin. A price increase for corporate and residential companies of over 2 percent would mean that the government’s monetary goals are not met. Therefore, the company needs to focus on profitability and reducing the cost of production, supply, operation. Further, Rosa (2013, pp. 8.) confirms that the variation of trading volume based on the monetary policy increases the market’s volatility.

As the company is present on a global market and this includes the European Economic Area, the purchase of securities is necessary. The instability of different countries in the EEC and the difference in inflation rates calls for a similar investment strategy as the Federal Reserve Policy describes. Investing in low risk securities and reducing costs should be the main focus of the 2013 economic strategy plan of the company. As the 2013 FOMC paper concludes (FOMC1 2013, pp. 3.) “Yields of longer-term Treasury securities and foreign benchmark sovereign bonds

declined appreciably… Equity prices rose modestly, on net, supported in part by solid quarterly earnings reports.” The only investment strategy that carries low risk and reasonable return would be investing in equities and securities.

Some members of the committee concluded that the energy prices would decline in the course of 2013, therefore, in order to gain a competitive advantage, the company needs to focus on stability, customer service and increasing its market share worldwide. The instability of currencies, especially the fluctuation of Euro to Dollars and Japanese Yen due to the economic unreliability of some of the member countries calls for a careful and secure financial and investment plan. Taxation of global companies is likely to be revised in various countries, due to the increased focus on green policies, therefore, a strategy needs to be developed to prepare the company for the changes.

References

FOCM Report. Statement on Longer-Run Goals and Monetary Policy Strategy As amended effective on January 29, 2013. Web. http://www.federalreserve.gov/monetarypolicy/files/FOMC_LongerRunGoals.pdf

FOCM Report 1 (2013) Minutes of the Federal Open Market Committee April 30–May 1, 2013. Web. http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130501.pdf

Gavin, W., Keen, B., Kydland, F. (2013) Monetary Policy, the Tax Code, and the Real Effects of Energy Shocks. Web. <http://research.stlouisfed.org/wp/2013/2013-019.pdf >

Rosa, C. (2013) The High-Frequency Response of Energy Prices to Monetary Policy: Understanding the Empirical Evidence. Federal Reserve Bank of New York Staff Reports.