It has been a slow and long road towards recovery for the U. S. economy, since the housing bust and consequent recession of 2008. Low interest rates, coupled with irrational banking practices, and irresponsible lenders created an explosion of sub-prime mortgage holders when housing prices started to decline and the market imploded by 2008. The subsequent tsunami of foreclosures created losses in the billions for banks and the financial system and millions of investors sending the economy into a deep recession which we are still recovering from. At the time of the crisis in 2008 when the several financial institutions faced severe financial distress, credit markets froze and the economy had been brought to a standstill until the federal government stepped in.
The Federal Open Market Committee (FOMC) responded by creating the “Troubled Assets Relief Program” (TARP). This program allowed the U. S. Treasury to purchase up to $700 billion of illiquid mortgage- backed securities from key financial institutions in order to stabilize the economy and restore liquidity to the stressed money markets. The program aimed to stabilize banks, restore consumer confidence, and credit availability for businesses and individuals.
Additionally the TARP program also helped save the ailing domestic auto industry (GM and Ford), which allowed the government to preserve over one million jobs and save the automotive industry from bankruptcy. The FOMC is the branch of the Federal Reserve responsible for setting key market interest rates such as the discount rate and controlling the money supply through the buying and selling of government securities. Through continued government spending and maintaining an expansionary fiscal monetary policy, the FOMC has continued to maintain low interest rates leading to increase in capital investment but with the negative consequence of a subsequent decrease in the demand and domestic bond prices due to decreased interest rate yield for investors.
Currently in 2014 the FOMC and the central bank continue to support an “easy monetary policy”, aimed towards maintaining a low interest rate in order to stimulate easier borrowing, continued economic growth, and capital spending. Overall, domestic GDP growth for 2014 is forecast to increase from 2.5% in 2014 to 3% by 2015 fueled by stronger consumer spending and low interest rates (The Economist, 2014).
Our fiscal policy has supported federal quantitative easing through the bailouts and economic stimulus plan and will continue to do so as long as it is deemed prudent. The U. S. economy is contracting in the first quarter of 2014 mainly caused by winter bad weather and excess retail inventory. Current unemployment rate has declined from 7.4% in 2013 to 6.3% in 2014, showing a significant decline in the unemployment rate. It is worth mentioning that the quality of jobs had declined significantly with minimum wage service sector jobs replacing a lot of the higher paying manufacturing and professional job openings previously available in the past to Americans.
More worryingly for most Americans are the facts that inflation rates are poised to increase, as economic growth is expected later during the year. Furthermore the current political climate will make it increasingly difficult for effective policy making and the president will increasingly have to resort to “executive action” in order bypass the political blockade in our current Congress. References The Economist (2014). U.S. Economic highlights, Outlook 2014 to 2018.
Retrieved June 15, 2014 from The Economist database.