Unemployment and inflation have an inverse relationship meaning that as one increases, the other decreases. According to the textbook, an ideal situation for the Federal Reserve would be to achieve both a low level of unemployment and a low level of inflation. After the 9/11 attacks in New York, the United States was put in a tragic financial crisis that led to the recession in 2008. While the debate for the causes of the 2008 recession continue to develop, most focus on the role that the public monetary policy and the practices of private financial institutions played on the financial crisis in the United States.
Some economists claim that the origin of the crisis can be traced to the indebted US economy. The Fed’s misperception of costs and benefits of any further intervention is the main reason for its lack of attention to the unemployment problem according to economists and Wall Street Journal author Joellen Perry. Currently in the United States, unemployment is the larger issue. Reasons for unemployment in the United States include demographics, education, comparative wage levels, advances in technology, and the fiscal and monetary policy.
Unemployment is both the cause and effect to the economic growth rate, which ultimately is affected by both government fiscal policy and monetary policy. Since 2008, the United States has run large budget deficits accumulating to more than $1 trillion in debt and because the deficit was so large, it put upward pressure on interest rates, pressuring the Fed to use a stimulative monetary policy. The Federal Reserve took drastic measures beginning in late 2007 with the establishment of new credit facilities to provide liquidity to financial institutions.
During the recession, the Fed quickly lowered interest rates to stimulate the economy and increase the cash flow. I agree with the strategy used by the Fed regarding the monetary policy during the recession in the United States because it bettered the nation as a whole impacting different aspects of the economy. The Fed “expanded its balance sheet” (The Nation) by essentially printing more money in order to purchase mortgage back securities and US Treasury bonds.
Not only did this increase the prices for bonds, but it kept interest rates low motivating businesses and citizens to invest and borrow from financial institutions. They achieved lower interest rates by purchasing large amounts of treasury bonds and mortgage backed securities in addition to lowering the federal funds rate. This strategy I believe was the most successful because the Fed was able to sustain an increased cash flow, circulating more cash through the economy while aiding both the unemployment and inflation issues in the United States.
According to writer, John Makin, of the Wall Street Journal, the United States faced a credit crunch in June 2007. The credit crunch led to tighter credit conditions, which resulted in various aspects of the GDP, such as investment and consumption to be affected. Furthermore, the credit crunch also affected unemployment during the recession; a time when unemployment for workers ages 16 to 29 was 15. 2 percent, the highest since 1948 according to the Bureau of Labor Statistics along with Wall Street Journal writer Mary Pilon.
Along with commenting on unemployment for young workers, she also explained the relationship between college tuition and the unemployment rate of college students with degrees demonstrating the importance of having an education and graduating with a degree in time of a weak economy. With evidence from the Wall Street Journal and many economists, I believe that interest rates will increase throughout the course of this semester. During the past few years, interest rates have been historically low because the Fed has attempted to stimulate the economy by suppressing the interest rates.
However, currently the chances of increasing heavily outweigh the chances of interest rates decreasing. All of the above is not to say that inflation is not an issue currently in the United States. Rising inflation is the major cause of the ongoing increase in interest rates. In the United States, inflation affects the employees must stronger but as an entire nation, the US is affected more so by unemployment. Both are ongoing issues that the Federal Reserve continues to battle in the hopes of ending the financial crisis and pushing the US economy in the right direction.
1. Greider, William. “Can the Federal Reserve Help Prevent a Second Recession?”TheNation.com. The Nation, 26 Nov. 2012. Web. 9 Mar. 2013. <http://www.thenation.com/article/171126/can-federal-reserve-help-prevent-second-recession#>.
2. Madura, Jeff. Financial Markets and Institutions. 10th ed. N.p.: Florida Atlantic University, 2008. Print.
3. Murray, Sara. “Obstacle to Deficit Cutting: A Nation on Entitlements.” Online.wsj.com. Wall Street Journal, 14 Sept. 2010. Web. 8 Mar. 2013. <http://online.wsj.com/article/SB10001424052748703791804575439732358241708.html?KEYWORDS=recession+2008+united+states>.
4. Perry, Joellen, and Sudeep Reddy. “Inflation Is Stinging U.S. Workers Harder.” Online. Wsj.com. Wall Street Journal, 22 Aug. 2008. Web. 10 Mar. 2013. <http://online.wsj.com/article/SB121935236568761377.html>.
5. Pilon, Mary. “Bank of Mom and Dad Shuts Amid White-Collar Struggle.”Online.wsj.com. Wall Street Journal, 5 Apr. 2010. Web. 9 Mar. 2013. <http://online.wsj.com/article/SB10001424052748704207504575130171387740744.html>.