The Success of American Government and the Federal Reserve Been in Running the American Economy - Case Study Example

Economics For Global Business Student name Course name Institution Date of submission Student Number Introduction The government along with the Federal Reserve System play the most critical roles in running the U.S. economy (Koba 2015). The responsibility for monetary policy is assigned to the Federal Reserve by the Congress while retaining the supervision responsibilities to guarantee that the Federal Reserve abides by its statutory directive of maximising employment, stabilising prices, and moderating long-term interest rates (Engen et al. 2015). For these reasons, the two have generally worked together in running the American economy during the last two years. This paper examines the extent to which the American Government and the Federal Reserve have been running the American economy during the last two years. It further describes and evaluates the main macroeconomic policies used by the American Government and the Federal Reserve over the last two years. The success of American Government and the Federal Reserve been in running the American economy The responsibilities of the Federal Reserve boil down into four key roles: providing emergency liquidity using its lender of last resort functions, formulating and implementing monetary policy, supervising banks and providing payment system services to the government and financial institutions (Koba 2015). During the last two years, the government’s oversight over the Federal Reserve has served to make sure that the latter ensures accountability, and transparency, financial reform and financial stability and lastly, monetary policy (Congressional Budget Office 2015). The government has played significant supervisory roles in ensuring there is accountability and transparency at the Federal Reserve. Such efforts have increased the efficiency of the monetary policy. Since the financial crisis of 2009-2010, and its negative implications like unemployment, which were major concerns of the policymakers' attention, creating an explicit policy framework at the Federal Reserve became problematic. However, the Federal Open Market Committee (FOMC) stated its longer-term goals and policy strategies in January 2012. This created a long-term strategy of minimising inflation to 2%, and normal unemployment rate of between 5.2%. FOMC’s statement also proclaimed a declaration by the Federal Reserve to ensure stability in prices. Generally, the FOMC is a committee within the Federal Reserve that is charged with setting the interest rates and deciding whether the supply of money should be increased or reduced through the sale and purchase of government securities (Koba 2015). In the long run, it is the accountability and transparency of the Federal Reserve that was significant in ensuring that the institution's democratic legitimacy is upheld. During the last two years, the Federal Reserve has regularly ensured that the public access extensive information regarding the aspects of its activities. Indeed, during the last two years, there has been more accountability and transparency in the way the United States economy is run (Congressional Budget Office 2015). The Federal Reserve and the government have worked to fuel economic growth during the last two years. In particular, the Fed has served to stimulate the economy using three levels of sweeping purchase of assets of the agency debt, U.S. Treasury securities, as well as the agency mortgage-backed securities (MBS) since 2009, popularly referred to as quantitative easing (QE). The first level started during the global financial crisis in 2009 while the third level came too close in late 2014, during which the Federal Reserve’ balance sheet showed Us$4.5 trillion, representing five-times its size before the financial crisis in 2009 (Engen et al. 2015). The Federal Reserve and the government have also worked to stabilize the monetary policy. Rather than normalize monetary policy through the sale of its assets to lessen its balance sheet fast. In reaction to this, the Fed has made plans for raising the interest rates, as it has consistently increased the interest rate paid to banks on the reserves deposited at the Federal Reserve while simultaneously taking part in repurchase agreements (Engen et al. 2015). In response, a section of the Members of Congress raised concerns on the manner in which the Fed normalizes policy as potentially affecting inflation, prices or asset, and the manner in which particular sections of the financial markets function, including the repo market. Indeed, before the end of QE, the Federal Reserve stated it would be critical to maintain the existing target range for the federal funds rate in an extensive period (Engen et al. 2015). The government and the Fed have served to maintain interest rates at near zero to ensure rapid economic recovery after the Global Financial Crisis. Even as the economic recovery was repeatedly weaker than expected between 2011 and 2015, the Federal Reserve made repeated efforts to push back the period, when it would be fitting to raise interest rates (Koba 2015). Current media reports have indicated that many members of the FOMC are convinced that raising the federal funds would be proper before the year 2015 comes to a close. Currently, the interest rates have been maintained at near zero (Engen et al. 2015). Before the Financial Crisis in 2008, however, the short-term interest rates were not at the verge of reaching the zero lower bound. Therefore, The Federal Reserve and the government have worked to ensure economic recovery. The Federal Reserve and the government have also cut unemployment rate. Indeed, current estimates have projected unemployment rate to be a little below the Federal Reserve’s projection of achieving full employment by the year 2016 (Yellen 2014). However, the Federal Reserve has alluded to other labour market mechanism indicating a significant employment gap would be bridged. The government has also relied on policies like the apprenticeship schemes to offer the unemployed persons new skills needed for finding fresh employment in order to improve the incentives to look for gainful work. According to the Bureau of Labour Statistics, the government created more than 200,000 additional jobs in the month of August 2014 alone. This showed that unemployment had decreased by nearly 6.1 percent. Overall, more than 1.4 jobs were created in the year 2014 alone (Hartun 2014). Part 2 The main macroeconomic policies the American Government and the Federal Reserve have used during the last two years Monetary policy The government, through the Congress, forced the Federal Reserve to pursue greater policy changes in order to maintain sustained economic recovery. For instance, after the Great Financial Recession in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act extended the mandate of the Federal Reserve to evaluate the condition of the United States financial system, and by 2015, the increasing economic growth rates and declined unemployment rates encouraged the Fed to show impending normalization monetary policy (Yellen 2014). Monetary policy seeks to control the quantity of money circulating within the economy or the accessibility and cost of credit. The monetary policy falls within the province of the Fed. According to the Federal Reserve, monetary policy refers to the actions it carries out to influence the availability and cost of credit and money to advance its goals and objectives as mandated by Congress, including stabilising the price level and increasing employment (Koba 2015). Due to the prospects of households and businesses, consumers and buyers of capital goods have a significant influence on the key section of spending in the United States, as well as since the actions of the Fed have significance influence on these expectations. During the last two years, the Federal Reserve has tended to rely on three key instruments to carry out its monetary policy: open market operations, where the Fed buys existing securities in the United States. Indeed, the Fed relied on absolute purchasing of securities for its QE from 2009 to 2014, although normal open market operations were also performed using repurchase agreements (repos). Typically, whenever the Fed wished to put in liquidity into the banking system, it entered into repos. On the other hand, whenever it wished to eliminate liquidity, such as during the normalization period, it could enter into reverse repos. During the last two years, the Fed’s conventional monetary policy tool, also known as the federal funds rate, was used effectively lower after the global financial crisis. At this stage, the FOMC applied two unconventional policy tools: increase of explicit and forward‐leaning control of the federal funds rate and the use of the quantitative easing (QE) programs. The objective of these policy instruments was to offer additional monetary policy adjustment to assist in bringing an end to the recession in addition to strengthening the economic recovery long after the recession. The objective of the unconventional policy actions was to exert downward pressure on the long‐term interest rates, as well as to improve the financial situations in the United States, as well as stabilising prices for the property market and corporate equities (Koba 2015).  By bringing about favourable financial conditions, the Fed believed that it would serve to increase aggregate demand and prevent unwelcome disinflationary pressures by supporting consumer spending, the construction of industries, net exports, as well as intensified business ventures and investment. The QE programs consisted of maturity extension program (MEP), mortgage‐backed securities (MBS) and large‐scale asset purchases (LSAPs). At the same time, the Fed’s tendency to hold bonds and Treasury notes, as well as agency MBS and agency debt increased from US$500 billion before the financial crisis to more than US$4 trillion, during the close of the LSAP program in October 2014.  The LSAPs and MEPs extended the average period of the securities that the Fed held. In so doing, they minimised the duration of Treasury that the public held, compared to what could have instead happened. Fiscal Policy Fiscal policy refers to the changes to the national budget that the government creates and implements to influence the national economy. The mandate of creating and implementing the fiscal policy, therefore, lies with the government. During the last two years, the U.S. government has manipulated its spending and taxes with the view of stimulating economic growth, by influencing the aggregate demand for goods and services. In 2009, the government enacted the American Recovery and Reinvestment Act (ARRA) on Employment and Economic Output. This was in reaction to the financial crisis at the time. The Act was made to manage government spending. The Congressional Budget Office also expected that the ARRA would increase budget deficits by about US$787 billion from 2009 to 2019. Later in 2014, the ARRA managed to raise the real GDP by about 0.2%. It also increased amount of full-time-equivalent jobs by some 0.2 million by 2014 (Thoma 2014). The focus of ARRA was also to promote employment. In 2013, for instance, the recipients of ARRA funds reported an average of approximately 76,000 full-time-equivalent (FTE) jobs created. Those reports, however, do not provide a comprehensive estimate of the law's impact on U.S. Hence, ARRA has had significant effects in promoting employment. It has been further estimated that the ARRA policies has several effects on the economy during the financial year 2014 (Hummers 2010). For instance, they increased real gross domestic product (GDP) by about 0.2%. They also reduced unemployment rate by about 0.2%. ARRA also increase the number of persons in employment by about 0.3 million. The number of full-time-equivalent jobs was also increased by about 0.2 million (Thoma 2014). The fiscal policy has also focused on increasing the productivity of the labour force, based on the belief that having a labour force that is more educated can increase innovation in the economy through the development of more innovative ideas and ultimately implementation of these ideas. In 2013, for instance, the national government spending for education peaked at US $126 billion, representing about 15 percent of overall expenditure on education across the nation. Subsequently, intensified innovation increased the spending by the federal for education. Conclusion The government has played significant supervisory roles in ensuring there is accountability and transparency at the Federal Reserve. The Federal Reserve and the government have worked to fuel economic growth during the last two years. The government and the Fed have served to maintain interest rates at near zero to ensure rapid economic recovery after the Global Financial Crisis. The Federal Reserve and the government have also cut unemployment rate. The government, through the Congress, forced the Federal Reserve to pursue greater policy changes in order to maintain sustained economic recovery. During the last two years, the U.S. government has manipulated its spending and taxes with the view of stimulating economic growth, by influencing the aggregate demand for goods and services. In 2009, the government enacted the ARRA policies, which have increased a more productive labour force, innovative economy and reduced unemployment rate (Hartung 2014). References Thoma, M 2014, How Fiscal Policy Failed During the Great Recession, viewed 30 Oct 2015, Hartung, A 2014, Obama Outperforms Reagan On Jobs, Growth And Investing, viewed 30 Oct 2015, Yellen, J 2014, “What the Federal Reserve Is Doing to Promote a Stronger Job Market," 2014 National Interagency Community Reinvestment Conference, Chicago, Illinois Hummers, L 2010, "Reflections on Fiscal Policy and Economic Strategy," National Economic Council, viewed 30 Oct 2015, Congressional Budget Office 2015, Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output in 2014, viewed 30 Oct 2015, Engen, E, Laubach, T & Reifschneider, D 2015, “The Macroeconomic Effects of the Federal Reserve’s Unconventional Monetary Policies,” Finance and Economic Discussion Series 2015-005. Board of Governors of the Federal Reserve System (U.S.), viewed 30 oct 2015, Koba, M 2015, "The Federal Reserve: CNBC Explains," CNBC, viewed 30 Oct 2015, Read More