Even though it is 2015 now, the year has just started. Thus, this report focuses on the years 2009 and 2014, respectively because 2014 is the last full year so which the economic statistics are available.
As far as interest rates are concerned, the effective federal funds rate was 4.24 percent in 2007 but dropped to 0.16 percent only in 2008 and has mostly remained near zero since then. For example, it was 0.12 percent in 2009 and at the same level in 2014, too though there were slight ups and downs during the period 2009-2014 . This extremely low rate of effective federal funds rate is not surprising because the recent financial crisis of 2007 was arguably the most severe since the Great Depression of the 1930s and even now the nation has not made full recovery though economy is much better as it was in the early years of the crisis. The recovery has also been due to the Fed’s decision to keep interest rates low in order to boost the economy. Low interest rates encourage businesses and consumers to borrow more to fund their consumption and investment activities. The Fed continues to maintain low fed funds rate because economy has not made full recovery and inflation is not a serious concern as of now.
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"Fiscal and Monetary Policy and Economic Fluctuations".
As far as inflation is concerned, it was negative 0.4 percent in 2009 which means there was actually a deflation in the year 2009. In contrast, the nation experienced an average inflation rate of 1.6 percent last year which is still low though above 2009 rate. The deflation in 2009 should not come as a surprise because it was an extremely difficult year for the U.S. economy, with Consumer Confidence Index at a historic low of 25.3 . When consumer confidence level is low, they rein in their spending habits which results in declining aggregate demand for goods and services. As demand for goods and services fall, so do their prices which may also explain why U.S. experienced deflation in 2009. In contrast, the country experienced an inflation rate of 1.6 percent in 2014. While food and shelter prices did slightly increase in 2014, the declining energy prices helped keep the inflation rate low, especially during the second half of the year . Like food and shelter, energy costs comprise a significant proportion of total spending for most consumers, thus, any movement in energy prices may have material impact on the nation’s inflation rate.
The annual unemployment rate was 9.3 percent in 2009 and had significantly improved to fall to 6.2 percent by 2014 . The unemployment rate was high in 2009 because it was still the early phase of financial crisis and businesses had cut down production of goods and services as well as scaled back hiring activities due to weak demand and bleak economic prospects. But things had significantly improved by 2014. Private sector was more confident of economic prospects in 2014 and added 2.5 million jobs which also explains lower unemployment rate in 2014 as compared to 2009.
One monetary policy that could be used to encourage people to spend more in order to create economic growth is purchase of government bonds by the fed. By purchasing the government bonds, the fed will increase the money supply in the economy which, in turn, will help keep interest rates low. Low interest rates will encourage people to borrow more due to low cost of borrowing and increasing their consumption activities. This will help bring down the unemployment rate as businesses will hire more people to meet the growing demand for their goods and services. This growing demand for goods and services may also put upward pressure on inflation rate because prices go up when quantity demanded of goods and services go up and vice versa. Interest rates will remain low or even go down because interest rates have an inverse relationship with money supply and feds purchase of government bonds increases money supply in the economy.
One fiscal policy the government could pursue to encourage people to spend more in order to create economic growth is to lower taxes on the middle class. Lowering taxes on high income groups may not yield as much benefit because they tend to have lower marginal propensity to consume as compared to middle class. Lower taxes on middle class will encourage members of middle class to increasing their spending levels due to higher level of disposable income. Since they will increase demand for goods and services, it may help bring down unemployment rate as businesses will hire people to produce more goods and services. The greater level of spending by the middle class may also put upward pressure on inflation rate because prices of goods and services and their quantity demanded have positive relationship. The interest rates may also increase as members of middle class may increase their borrowing to fund their consumption activities.
It is clear 2009 was quite a difficult year for U.S. economy and things had significantly improved by 2014 even though full economic recovery has not yet happened. The inflation rate was negative in 2009 which is quite a rare event in the U.S. but was under 2 in 2014 though still low. The Fed has continued to keep fed funds rate low during the period 2009-2014 in order to encourage businesses and consumers to borrow more to engage in consumption and investment activities. As well as unemployment rate is concerned, it had significantly fallen in 2014 as compared to 2009 level because private sector is now more actively hiring due to more optimistic economic outlook.
- Bureau of Labor Statistics. (n.d.). Labor Force Statistics from the Current Population Survey. Retrieved January 21, 2015. Web.
- Federal Reserve Bank of St. Louis. (n.d.). Effective Federal Funds Rate. Retrieved January 21, 2015. Web.
- Hartung, A. (2013, May 16). Economically, Could Obama Be America’s Best President? Retrieved January 21, 2015. Web.
- Kell, J. (2015, January 7). Private employers added more than 2.5 million jobs in 2014. Retrieved January 21, 2015. Web.
- Mutikani, L. (2014, October 22). U.S. inflation muted in September as energy costs drop. Retrieved January 21, 2015. Web.
