This paper will look at the years 2009 and 2014, respectively to evaluate the evolution of U.S. economy over the last five years. As far as the interest rates are concerned, federal funds rate in the U.S. serve as a reliable guide to the situation of interest rates in the country. The effective federal funds rate was only 0.12 percent in December 2009 (Federal Reserve Bank of St. Louis) which is quite a low level. But this low level should not come as a surprise since the nation was still dealing with the consequences of the financial crisis that had started not long before. Thus, low federal funds rate was only a logical response in order to make borrowing cheaper for both consumers and businesses. Low interest rates encourage businesses and consumers to borrow more and spend which helps the economy grow.
The U.S. economy had not fully recovered but still had significantly improved by December 2014. One may expect the federal funds rate in December 2014 to be higher than the level in December 2009 but the level was still 0.12 percent (Federal Reserve Bank of St. Louis). This is not the say that the federal funds rate remained same during the five years period because it had climbed to as high as 0.20 percent at one time. But overall the federal funds rate remained at low level which may be due to Fed’s conviction that the recovery, though encouraging, still had some distance to go before federal funds rate could be raised.
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"Fiscal and Monetary Policy".
As far as inflation rate is concerned, the average monthly inflation rate during 2009 was -0.4 percent (US Inflation Calculator) which is an anomaly because it is not often we see negative inflation rate in the U.S. or any other country. There were several factors that could explain the extremely low inflation rate during 2009. One factor was the financial crisis which led to excessive idle production capacities in factories as well as massive lay-offs, putting downward pressures on both wages and price levels. Another factor was importers unwillingness to raise prices of their products in the U.S., in order to stay competitive (Lazzaro, 2010). The average monthly inflation rate in 2014 was 1.6 percent (US Inflation Calculator) which was still low though higher than 2009 levels. One of the reasons why inflation rate was still low in 2014 despite improving economy was declining fuel costs. Another reason was competitive prices of goods and services in a wide range of industries such as clothing and airlines (Chandra, 2014).
The unemployment rate was 7.8 percent in January 2009 but had risen to 9.9 percent by the end of the year (Bureau of Labor Statistics). This shows how 2009 was quite a difficult year for the economy and massive layoffs had further deteriorated the already high unemployment rate of 7.8 percent by the end of the year. The unemployment rate was 6.6 percent in January 2014 and had declined to 5.6 percent by the year end (Bureau of Labor Statistics) which was a positive trend, unlike 2009. One of the reasons, unemployment rate declined during 2014 was growing optimism among American companies which responded by boosting their hiring activities. A news article in July 2014 reported that employers added over 200,000 employees in each of the five months from February to June 2014 (Schwartz, 2014).
There are many fiscal and monetary policies that may encourage people to spend more money to support the economy. One recommended fiscal policy is for the federal and state governments to increase expenditures on programs such as infrastructure. These programs will not only provide employment to hundreds of thousands of people who will use the income to increase their consumption activities but these programs will also provide government business to many private sector companies, either as contractors or supplier of inventories. The U.S. national debt is indeed a concern but now is not the time to scale back government spending because it may end up doing more harm than good. The government may scale back spending once the economy has fully or mostly recovered because scaling back now will only slow down the recovery process.
One monetary policy that may encourage people to spend more money to support the economy is keeping federal funds rate low. This will help expand the money supply in the economy, resulting in lower interest rates which would encourage both businesses and consumers to borrow more. Fortunately, fed has already been following this policy and it is reasonable to assume fed’s actions have played a major role in relatively faster pace of recovery of U.S. economy as compared to Europe.
It is clear 2014 has been a much better year for the U.S. economy as compared to 2009 when inflation was extremely low due to quite high unemployment rate and weak demand for goods and services. While the U.S. economy has not fully recovered yet, it has made a substantial progress over the last five years. The fed continues to maintain low federal funds rate which is positive sign is going forward. The inflation rate may be higher than 2009 level but it is still low and, thus, inflation concerns are not a priority for fed now though it may soon change.
- Bureau of Labor Statistics. (n.d.). Labor Force Statistics from the Current Population Survey. Retrieved January 30, 2015. Web.
- Chandra, S. (2014, October 22). Inflation Shy of Goal Means Fed Can Keep Rates Low: Economy. Retrieved January 30, 2015. Web.
- Federal Reserve Bank of St. Louis. (n.d.). Effective Federal Funds Rate. Retrieved January 30, 2015. Web.
- Lazzaro, J. (2010, January 15). CPI up 0.1% in December, 2009 Inflation Remains Tame. Retrieved January 30, 2015. Web.
- Schwartz, N. D. (2014, July 3). Hiring Is Strong and Jobless Rate Declines to 6.1%. Retrieved January 30, 2015. Web.
