Evaluate the role and effectiveness of the Federal Reserve in stabilizing the economy since the 2007-2009 recession and its continued impact on the current state of the economy:
- Use data from the Fed publications and other sources to support all of your positions.
In your discussion make sure that you cover:
- The monetary policy tools.
- The ways in which the Federal Reserve adjusted the tools in response to the financial crisis of 2007–2009.
- Based on your research, did the financial crisis of 2007-2009 compromise the independence of the Federal Reserve?
- The strengths and weaknesses of using monetary policy versus fiscal policy when promoting economic activity and preserving price stability.
- Based on your research, should the Fed change some of its current monetary policy targets, such as the 2-percent inflation target?
Required minimum number of academic quality references: 4
The 2007-2009 Great Recession was seemingly the world’s worst economic crisis since
the great depression that had taken place in the 1930s. The Great Recession took place between
December 2007 and June 2009. The recession was caused by the increase in the spending of the
United States government and tax cuts. These economic measures contributed significantly
to the rise of a banking crisis, resulting in a federal budget deficit. The United States Gross
Domestic Product (GDP) dropped by over 4% during this period (Beltran et al., 2019). Being the
sole banking system, the Federal Reserve had a role to play in stabilizing the global economy
through the implementation of various monetary and fiscal policies. The recession caused a
significant incline in income inequalities among people from different social classes. Thus there
was a need for the Federal Reserve to streamline the private sector. This paper covers in detail the
role and efficacy of the Federal Reserve in the stabilization of the economy during the 2007-2009
recession and its impact on the current economic state.
The history of the Great Recession can be traced back to 2001 when George W. Bush was
elected for the presidency. Upon taking office, U.S. President George W. Bush introduced
economic measures one of them being large tax cuts that were believed to be the largest in U.S.
history (Beltran et al., 2019). The tax cuts incorporated a number of tax credits such as child tax
and all marginal tax rates. Critics of the Bush Tax Cuts argued that the tax cuts were only of
benefit to the upper class and thus resulted in a substantial incline in income equality, a decline
in the supremacy of labor unions, and technological advances inequalities. President George W.
Bush also implemented an increase in federal spending in various sectors of the economy such as
defense and Medicare. According to research, the United States government spent large amounts
of resources in the Iraq and Afghanistan wars (Beltran et al., 2019). The U.S. economy began to tip into recession in 2007 with a significant upsurge in the rates of unemployment and instability
of the financial markets. Consequently, the spending of consumers began to decline. In a bid to
mitigate the harm that had been caused by the financial crisis, the Bush Administration
authorized for an intervention by the Federal Reserve.
The Federal Reserve implemented various monetary policies to stimulate the economic
activity of the United States by adding to the pre-existing level of the money supply (Griffiths et
al., 2011). Decisions regarding the implementation and adjustment of the monetary policies were
made by the Federal Open Market Committee (FOMC).
Interest Rate Cuts
Interest rate cuts were one of the policies that were implemented by the United States to
alleviate the effects of the financial crisis. The main aim of this policy was to respond to the
rising rates of unemployment. Reduction of interest rates usually is instrumental in boosting the
economy by enhancing the capability of banks to pay back their loans. Research has it that
interest rate cuts also motivate people to make investments and renovate the already existing
investments (Griffiths et al., 2011). This, in turn, results in an economic depression creating an
excess capacity for economic output and employment. However, if the economy is not
depressed, an incline in the spending habits of investors and consumers may cause inflation
which is a risk factor for high interest rates.
In the case of the 2007-2009 great recession, the Federal Reserve started reducing the tax
rate from the beginning of September 2007 to mid-2008. However, the economy was still
deteriorating calling for a pause of the process of cutting the interest rates. The reason for this