The severity of the recent financial crisis can be judged by the fact that the U.S. economy is still in a recovery phase despite more than half a decade of time since the beginning of the crisis. Both the U.S. Government and the Fed have been trying to recover the economy through a combination of fiscal and monetary policies and even though significant progress has occurred, there is still a long way to go. In order to better understand the progress that has occurred over the last five years, it is important to look at different economic indicators such as interest rates, inflation, and unemployment rate.
2009 could be considered as the starting point of the recovery from the recent financial crisis as real quarterly GDP growth finally turned positive during the second half of the year (The Department of the Treasury, 2012). When economy is relatively weak, inflation rate tends to be low but such was not the case in 2009 when inflation was relatively high at 2.7 percent due to high energy prices among other factors (Coin News, 2010). But while high inflation rate in a struggling economy was a bit of surprise, same cannot be said for the unemployment rate which stood at 9.3 percent, in stark contrast to only 5.8 percent in 2008 and even lower unemployment rate of 4.4 percent in 2007 (Council for Economic Education, 2013). Fed had learnt from previous crisis that it is a sound policy to encourage consumption during recession and not surprisingly the interest rate was almost near zero at 0.00-0.25 percent in 2009 (Federal Reserve Bank of New York, 2014).
2014
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"The Fiscal and Monetary Policy and Economic Fluctuations".
The U.S. economy has been taking gradual steps towards full recovery as evident from the fact that the expected GDP for the current year is 2.2 percent (The Heritage Foundation, 2014). As far as the inflation rate is concerned, it was 2.10 percent last month and has declined to 2 percent this month which is a positive trend. It is reasonable to assume that low energy prices may also be helping containing inflation rate. The unemployment rate was 6.10 percent last month but has slightly increased this month to 6.20 (Trading Economics, 2014). As far as the interest rate is concerned, Fed continues to maintain it at 0.00-0.25 percent (Federal Reserve Bank of New York, 2014) which means Fed believes the economy still needs boost.
5-Years Trend
In terms of GDP, the nation has definitely made a progress over the last 5 years and credit should be given to Fed, too that continues to maintain the interest rate at historically low levels to encourage borrowing by both consumers and businesses. But Fed appears to believe there is still some room for the economy to grow without triggering serious inflationary pressures which may be why it has been maintaining low interest rate over the past five years. The unemployment rate has declined because economic activity has increased in the private sector. Credit for lower unemployment rate now as compared to five years ago should also be given to government spending over the last few years though it has significantly declined due to concerns about budget deficits and growing national debt. In addition, the government is not oblivious to the fact that the private sector can now play a larger role due to growing business confidence. Inflation rate is also at more acceptable level now as compared to five years ago because energy prices are lower (Norris, 2013).
Recommendations
One strategy to encourage people to spend more money to create economic growth would be to lower tax rates, especially on Americans from low income and middle class groups. Low income and middle class groups tend to have higher propensity to consume as compared to high income groups. As a result, they will spend more of the extra income due to lower taxes on consumption of goods and services which will benefit the economy. The unemployment rate may also decline because producers of goods and services may have to hire more people in order to meet the rising demand for goods and services. This may though put upward pressure on inflation rate, especially if more money is chasing a limited supply of goods and services. The interest rate may also increase because Fed may have fewer reasons to maintain the federal funds rate at low level, also due to concern about high inflation.
The second strategy to encourage people to spend more money to create economic growth is for the Fed increase purchase of bonds in the open market. When Fed purchases bonds, it helps increase money supply in the economy which puts a downward pressure on the interest rates. As a result, it is cheaper to borrow and both consumers and businesses respond by increasing borrowing to fund investment and consumption activities. As already noted, such a move helps lower interest rate and may also help lower unemployment rate as businesses hire more people to meet the rising demand for their goods and services. The impact on inflation rate may be upwards due to strong demand trend and it is especially true when demand outpaces supply.
- Coin News. (2010, January 15). US 2009 Inflation Rises 2.7%, Inflation Calculator Update. Retrieved September 4, 2014.Web.
- Council for Economic Education. (2013). Focus on Economic Data. Retrieved September 4, 2014.Web.
- Federal Reserve Bank of New York. (2014). Federal Funds Data. Retrieved September 4, 2014.Web.
- Norris, F. (2013, November 15). Around the World, Inflation Is Falling to Levels Not Seen for Years. Retrieved September 4, 2014.Web.
- The Department of the Treasury. (2012, May). Recent U.S. Economic Growth in Charts. Retrieved September 4, 2014.Web.
- The Heritage Foundation. (2014). United States. Retrieved September 4, 2014.Web.
- Trading Economics. (2014). United States | Economic Indicators. Retrieved September 4, 2014.Web.
