Fiscal and Monetary Policy and Economic Fluctuations Research Paper

economic situation in the United States is favorable compared with five years ago. Five years ago, it was late 2009 and in the depths of the Great Recession, so performing better than those levels is no great achievement. But as a point of comparison, all metrics are better today. The annualized rate of GDP increase in the third quarter of 2014 was 3.9%, down from 4.6% in the second quarter, according to the Bureau of Economic Analysis (2014). In 2009, the Q3 GDP was 1.7%, which is a low number, but at the time represented positive growth following three straight quarters of declines. Thus, technically, Q3 2009 was when we emerged from recession (Treasury, 2012). GDP growth in the interim has been uneven, but the past couple of quarters indicate healthy, manageable growth that should not lead to runaway inflation.

Unemployment, which is a lagging indicator, is 5.8% as of October 2014, which is the lowest level since July 2008. In October 2009, it was 10.0%, which was the peak level. This peak occurred as a result of the recession, as again unemployment lags GDP. The levels in 2007, before the recession, were in the 4.somethings, so the current level is still higher than pre-recession levels. It has been declining ever since October 2009, but unemployment is still higher than it should be in a healthy economy.

Inflation has remained low during this period. The Bureau of Labor Statistics tracks inflation. In October 2014, it was 0.0%, with an annual increase of 1.7%. This is below the target inflation rate of the Federal Reserve, with is 2% (BOG FRS, 2013). Thus, despite the strong economic growth in recent quarters, inflation is not following suit, but is in fact rather muted. Part of the reason inflation flatlined in October was a decline in energy prices, as the CPI minus food and energy saw 0.2% increase in the month (BLS, 2014). Five years ago, this was 0.1% for the month, and a deflationary rate of -0.18% for the year. This deflation was the result of the recession, and was the culmination of a deflationary trend that began in March 2009.

Interest rates have been near zero the entire time. The discount rate is current 0.75% and five years ago it was 0.5%. These rates are quite low historically and indicate stimulatory monetary policy. They were used in 2009 to help spur business investment by lowering the cost of capital, and the same logic applies today.

2.

The story of the changes in the last five years is the story of the Great Recession and the recovery from it. Since 2009, the GDP has increased and it is growing at a healthy rate at present. The GDP was just coming back to growth in the fall of 2009 after a long period of decline. In the five years since, the GDP has mostly been growing, a sign of recovery. While the recovery has been uneven, and maybe could be considered to be weak, recent quarters have shown that the economy is finally growing at a stable, healthy rate. The even growth might reflect in the odd combination of fiscal and monetary policy responses to the recession.

The unemployment rate hit its apex (or nadir, more realistically) in October 2009 as the result of the Great Recession. The next five years have seen a slow but steady decline in the unemployment rate, to the current level. There is no reason to believe that the current level is anything other than another stopping point…