An online article by Lucia Mutikani on Reuters reported that Fed’s easy monetary policy has helped prevent the adverse economic impact that was expected from tighter fiscal policy. Some economists expected Q1 2013 economic growth to be slower due to potentially higher tax rates as well as government spending cuts but the predictions didn’t materialize. The U.S. economy has benefitted from the fact that the interest rates have been near zero since December 2008 and central bank has pumped $2.5 trillion into the economy to improve economic performance and employment rate (Mutikani, 2013).
The experience has shown that monetary policy has exerted greater influence on the economic performance than the fiscal policy. Some economists have admitted that they overestimated the impact of potential government spending cuts on business activities. The negative impact of tighter fiscal policy has also been lower because the U.S. economy is in a better condition than it was few years back (Mutikani, 2013).
Consumers have also been spending more because they have been able to cut down their debt burden and credit access from lending institutions has eased. The Fed data also showed that household debt in Q4 of 2012 grew at the fastest rate since early 2008. This is also a sign that the Fed’s monetary policy has been working since the public is more willing to accumulate debt and spend it (Mutikani, 2013).
This article addresses several topics discussed in chapter 13. One of the topics is taxation which the economists feared would negatively hurt economic growth if raised though their expectations didn’t fully materialize. The chapter also mentions that the individuals and the firms look at their income after-tax when making spending decisions. The chapter also mentions that a rise in government spending which is not accompanied by higher tax revenue, means the government has to borrow which also raises interest rate and discourage borrowing by firms. This may explain why according to the article, interest rates have remained lower. Since the government spending is expected to decline, the government may not need to borrow as much as it would have otherwise, and, thus, it has been relatively easier for the Fed to make sure interest rate remains low.
The chapter also explains that low interest rates mean businesses and individuals have more disposable income and this is exactly what we have learnt in the article that low interest rates and ease of obtaining credit has encouraged businesses and the general public to borrow more. This also helps us understand the rationale behind Fed’s decision to keep interest rates low so that the U.S. economy is able to quickly recover from recession.
The article mentions that economists feared government spending cuts would negatively harm economic growth and their fears were legitimate. As the chapter mentions, government spending during abnormal times helps stimulate economic growth by providing income to the public which is then used on consumption activities. The U.S. Government used this formula during the Great Depression as well. The chapter mentions that fiscal policy can be quite helpful during severe downturn and I remember reading in the news that the U.S. financial crisis would have been much severe were it not for the actions of the U.S. Government.
Mutikani, L. (2013, March 22). Easy Fed softens fiscal policy punch on economy. Retrieved August 25, 2013, from http://www.reuters.com/article/2013/03/22/us-usa-economy-growth-idUSBRE92L03O20130322