The results from 2006 fourth quarter have shown a positive outlook for the U.S. economy based on real activity. Real GDP rose at an annual rate of 3.5 percent in the fourth quarter. The unemployment rate dipped just below 5 percent to 4.5 percent. Consumer spending increased, particularly real personal consumption expenditures. Non-durable goods increased 6.9 percent, and Gas prices began to decrease which helped consumers to retain more discretionary income.
Although there showed increases in consumer spending, inflation increases have abated largely due to the decline in crude oil prices, and the slowdown of the housing market. This slowdown in the housing market was primarily due to the inflated prices, which related inversely to real wages during the same time. Now due to this sharp decrease in new home construction and increase in empty inventory, the economy is in need for an increase in the money supply.
I would adopt an expansionary policy for the economy right now. My reason is the economy has recovered from inflationary prices of oil, homes, and durable goods, but unemployment is not at an optimal level. The fed can accomplish an expansionary policy by decreasing rates. A decrease in nominal interest rates will decrease the amount of saving and promote spending. Consumers will have more confidence in the purchase of durable goods if they can retain low rates. Large purchases can stimulate the economy to create jobs, therefore promoting more consumer and per household spending.
The fed can also use the open market to buy government securities from banks thereby increasing the number of reserves banks have on hand. This will then cause the rates to decrease. Although rates will only increase nominally it will still improve consumer confidence and help to promote a healthy economy by the creation of more jobs. This could in turn result in increased spending for the economy. Some would argue this point but I believe that in order for the economy to decrease that deficit, more spending must occur. Consumers need more money, and more jobs for this to occur.