During the period before 2000, monetary policy in USA was less discretionary, more predictable and was focused on ensuring price stability of goods and services; this meant that the FED avoided growth in money and interest rates that had previously caused periods of booms and burst. In the recent past, this trend has changed and FED lowered the interest rates to abnormally low levels, which saw a large scale uptake of mortgages in the country. With the change in monetary policies by lowering the interest rates, the rate of inflation started to rise, which forced FED to intervene; the level of intervention adopted by the authority was more tight than that which they would have adopted had they not reduced the interest rates. The tightening of the monetary policy caused panic among the investors, and moreover, the increase in interest rates also meant that the individuals who had taken up mortgage to finance their housing plans were unable to service the loans.
FED increased liquidity in the market to help the economy recover from the depression that a rise in interest rates had caused therefore stabilising the markets. FED did this by increasing the level of reserve balances and reducing the deposits that it requires commercial bank to hold. After the 2008 depression, United States of America has adopted a zero lower bound on the norminal interest rate as a discretionary intervention, in addition, the country has also embraced quantitative easing which includes large scale
buy out of mortgages and treasuries (Taylor, 338). Fiscal policy The government of the United States of America has been spending more than it earns, this has the effect of increasing the debt levels in the country. In the recent past this debt has risen tremendously leading to the country’s debt levels reaching alarming levels which needed intervention. The country’s fiscal policy has deviated from investing in public goods, which may increase competitiveness in the economy and focussed more on other sectors such as Medicare, which represent entitlement (Havard business review, 114). The tax regime in the country has also done nothing to improve the situation since the corporate tax code ensures that high levels of taxes are levied but the revenues do not increase significantly. In addition, there is mortgage interest deduction, which has worked to ensure that money that would be more productive in other areas of the economy is tied to the housing sector. In the recent past, the US government has adopted a countercyclical and expansionary fiscal policy where government spending has been on the rise during economic downturn, for instance, the 800 billion dollars stimulus package that the government enacted in 2009. However, this stimulus package was cancelled out by some states, which reduced their spending in order to balance budgets therefore neutralising the effect of the stimulus package. The government has also changed the tax regime with temporary tax cuts for some individuals below a certain income threshold set to expire on 31st December 2012 being extended permanently. This increases the amount of disposable income for people in the income bracket and hence money available for investments. Fiscal and monetary policy in the US economy