Introduction
This paper summarizes the key policies that were implemented by the United States Federal Reserve Bank in the period between 2008 and 2010. This time period under review presented a unique economic environment for the Federal Reserve and the US economy as a whole, due to the Global Financial Crisis which begun in the second half of 2008. This paper seeks to understand the key decisions that the Fed took in averting the deepening of the crises, and in steering the economy back on the right course. By and large, the decisions taken by the bank are to a large extent a reflection of the leadership style and capabilities of the Fed`s chairman; who acts as the spokesman and face of the Federal Reserve. This is by virtue of the power vested in this position of setting the Fed`s agenda, and controlling its meetings (Mishkin, 324). Between 2008 and 2010, the chairman of the Fed was (still is) Ben Bernanke.
In this paper, real data collected from various sources has been used to analyze the overall policy-making decisions of the Fed during the review period. As will be seen, this data and information has been presented in various graphs and diagrams. The data relates to the main metrics of the Fed`s policy goals. These are economic growth as per the Real GDP; the overall price level as captured by the inflation rate; the average level of interest rates; and finally, the goals and objectives of the Federal Reserve Bank (Mishkin, 328).
Economic Growth
The second half of 2008 marked the official start of the Global Financial Crisis which started in the United States and spread quickly to other major economies such as the Eurozone and Asia Pacific regions. During this time, the average recorded Real GDP stood at 0.3% in 2008, while 2009 recorded a mean rate of (3.1%). This slowdown in the economic growth rate was attributed to widespread default of sub-prime mortgage securities, held mainly by large commercial banks and government agencies such as Fannie Mae and Freddie Mac. The direct result of this crisis was the drying up of liquidity within the coffers of financial institutions, leading to a scenario referred to as the credit crunch (USA.Gov).
The lack of liquidity within the financial markets impacted business entities negatively, with some being forced to fold their operations due to their inability to meet their credit obligations and hence remain solvent. By the time this financial crisis had bottomed-out in the second half of 2009, the US Real GDP had contracted by 5.1%, shedding approximately $680 Billion worth of Real GDP. Unemployment had increased to 10.1% in October 2009, compared to just 4.6% towards the end of 2007.
According to Bertaut and Paunder, the Fed made significant policy decisions that were intended at halting and ultimately reversing the effects of the financial crises. The Fed sought to create the much needed liquidity by lending to financial institutions such as banks at subsidized interest rates, so as to ensure that their operations remained solvent. These institutions extended the same credit to borrowers, and these steps resulted in the gradual halting of the crises.
The Price Level
In economic terms, the price level refers to the average increase in the cost of goods and services relative to a specified time period. Price level is measured through key inflation indicators such as the Consumer Price Index. An increasing inflation rate may be an indicator of economic growth only if it is confined within the acceptable limits. If the inflation rate increases at a level that is too high, it could result in negative and adverse effects on the overall economic growth rate of a country (Mishkin, 236).
During the 2008 to 2010 financial period, the inflation rate dropped significantly in 2008 and 2009, and increased slightly in 2010. In 2008, the average inflation rate was 3.8%, while the 2009 average rate according to the US Government statistics was a paltry (0.4)%. This rate was recorded rate in the United States in more than 30 years. This was directly attributed to the financial crisis that had the plagued the country from the beginning of 2008 and for most of 2009. In 2010, the inflation rate increased slightly to 1.6%, buoyed mainly by key fiscal and monetary previously effected to tame the financial crisis (USA.Gov).
One of the main goals of the Federal Reserve Bank is to ensure that inflation is kept in check. The Fed accomplishes this goal through an inflation-targeting approach, whereby it identifies a preferred inflation rate beforehand and subsequently takes the necessary steps to ensure that this level is attained. During the 2008 to 2010 financial period, the average inflation rate fell below the Fed`s targeted rate and hence inflation was generally not problematic. However, it must be noted that this was the result of the prevailing financial crisis; and not the initiatives or policy decisions undertaken by the Fed or its chair, Ben Bernanke (Bertaut and Paunder).
Interest Rates
The average level of interest rates in a country is largely indicative of the prevailing economic conditions that the country is experiencing at any given point in time. Central banks such as the Federal Reserve Bank constantly review the economic conditions of a country at various points in time within a financial year, and normally adjust the interest rates so as to reflect these conditions (Mishkin, 400).
The 2008 Global Financial Crisis resulted in the drying up of credit markets in the United States and in many other large economies around the world. Because of this, many small and medium-sized business enterprises were forced to shut down due to their inability to access the credit facilities needed to finance their business operations. Larger financial institutions and manufacturing entities were also affected deeply by the crisis, with some collapsing entirely and others being forced to opt for government bailout money so as to forestall their imminent closure. These bailouts were as a result of the concerted efforts by Congress to implement the necessary fiscal policies that were needed to forestall the crisis (Bertaut and Paunder).
In terms of monetary policy, the Federal Reserve engaged in a raft of measures aimed at bringing the crisis to an end. The Fed drastically cut the Fed Funds Rate from a high of 3.5% in January of 2008, to a low of 0.25% in December of the same year. The underlying intention of these drastic rate cuts was to encourage borrowing among consumers and discourage saving due to the cheaply available credit. In so doing, the economy would be able to start growing again in the face of the dire recession which it was currently facing. As the economy begun to improve, the Fed gradually increased the interest rates throughout 2009, in line with the improving conditions being experienced slowly (USA.Gov).
Targets and Goals of Monetary Policy
There are four main goals and objectives of the Federal Reserve Bank. These goals form the underlying framework within which monetary policy is implemented in the United Sates. These are to ensure that inflation is kept in check; to constantly maintain full employment in the economy at all times; to moderate the prevailing business cycle; and finally, to contribute towards the attainment of long term growth of the economy. These stated goals and targets of the Fed usually define the mandate of the Fed Reserve chairman; and they act as the benchmarks on which the chairman`s overall performance is evaluated (Mishkin, 326).
During the 2008 to 2010 financial period, the Federal Reserve took various measures in the pursuit of their goals and objectives, bearing in mind the prevailing financial crisis which the country was currently facing. The Fed lowered the Fed Funds rate in 2008 so as to spur borrowing and rejuvenate the economy from the negative effects of the deep recession. The Fed also invoked their ‘borrower of last result’ power by lending to banks and other financial institutions with the intention of availing the liquidity that was needed following the resulting credit crunch (Bertaut and Paunder).
In March of 2008, the Fed engaged in open market operations by buying $300 Billion in Treasury securities and $200 Billion in Agency debt. These actions were geared towards creating liquidity in the market and ensuring the moderation of the negative effects of the business cycle`s recession which the economy was currently facing. These actions were also aimed at restoring the economy back to full employment. In so doing, these policy decisions of the Fed were expected to result in long term growth of the economy (USA.Gov).
Conclusion
In closing, the Federal Reserve Bank engaged in various policy-making decisions during the 2008 to 2010 financial period. These actions were mainly influenced by the negative economic conditions that the country had faced due to a massive downturn. At the end of the period, these policies had succeeded in steering the country out of this prevailing economic recession.
The graphs below graphically depict the various monetary policy metrics that the Federal Reserve Bank engaged in during the 2008 to 2010 financial period. The sources of the graphs are duly indicated below them.
Source: USA.Gov
Source: USA.Gov
Source: USA.Gov
Works Cited
Bertaut, Carol & Paunder, Laurie. Federal Reserve Bulletin. The Federal Reserve Board, 2009.
Web. 23 Feb. 2014.
Mishkin, Frederic. The Economics of Money, Banking, and Financial Markets: The Business
USA Government. USA Government Made Easy, 2012. Web. 23 Feb. 2014.
