Introduction
The COVID-19 pandemic led to an unprecedented contraction in the economy of the United States. The impact of the pandemic cuts across all departments within the federal government. Hiccups in supply chain management led to inflation due to the high demand for goods and dependability on imports. The lack of essential goods the country faced due to the lockdown in the trading partners led to a sharp decline in economic growth. The federal government had to set out policies to curb the standards of living that were on the hike. Supply chain management was greatly affected due to the travel restrictions put by the country. The slow recovery rate by other foreign countries led to insurgence in demand that could not be satisfied by imported goods. The pandemic significantly hit tourism due to international and local travel bans. Laying down workers in the recreation sector resulted in a high dependency ratio within the United States, which called for subsidies and a review of monetary and fiscal policies.
Deaths resulting from the pandemic in the United States were many, so policies to support the affected population were necessary. Concerning the economy, the gross domestic product (GDP) fell by 8.9% four months after the pandemic hit the United States, making it the sharpest drop in history (Pooter et al., 2020). The GDP fall was attributed to monetary and fiscal policies set by the country as part of subsidies and ensuring reasonable living standards for the locals. Actions that ensured the efficient flow of money within the economy and prevented high cases of inflation were discounting the goods consumed. Market operations could not be opened since the movement of people was restricted as prevention, a measure of COVID-19. This paper will address the effects of monetary and fiscal policies set by the U.S. government to influence the economy during the pandemic.
Federal Reserve’s Monetary Policy during the Pandemic
The Federal Reserve Board, an economic institution in the United States, is responsible for regulating financial markets. The board had the heavy task of controlling money flow and providing favorable interest rates on goods during the pandemic. Federal Reserve has reduced economic vulnerability during the pandemic by devising tax relief easing policies. The policies have reduced the unemployment rate and brought positive growth in the gross domestic product. The country faced a sharp 8.9% drop in GDP once the pandemic struck (Pooter et al., 2020). The board was mandated to devise policies that would ensure economic stability. However, monetary policies have led to a long-term negative effect concerning economic growth, as discussed in the subsequent topics. This section discusses the long-term impacts of the revision of target rates, expansion policies, and regulation of market function in the U.S. economy.
Analysis of the Monetary Policy Adopted by the U.S. Federal Reserve
In the United States, Target Funds are loans banks offer businesses to aid their operations. Before the pandemic, the federal funds rate stood between 3% and 3.25%, per the Federal Open Markets Committee (Hameed, 2022). According to Surz (2018), the interest rates were lowered to 1.25% after the country’s pandemic hit. The fund rates guide overnight lending in banks in the United States. Reducing the interest rates on loans encouraged more lending and loan repayment among the defaulters. Since the economy had come to a standstill due to the reduced flow of money, the reduction helped the economy at the expense of the banks (Mankiw, 2020). Banks in low social class regions offered zero-interest rate loans, ensuring business activities went on as usual. To support the U.S. economy, the Federal Reserve set a rule to ease the interest of public health was jeopardized due to financial reasons.
Federal service in the United States adopted an expansionary policy stance to respond to the global pandemic. This type of monetary policy ensured that the interest rates on goods were significantly reduced. Qualitative easing (Q.E.), which involved the purchase of securities by the United States federal service from the open market, was adopted. The main aim of quantitative easing was to improve the flow of funds within the economy and reduce interest rates imposed on goods and services in the country (Bova, 2021). U.S. federal adopted the nominal principles in economics, which states that money is purchasing power is what matters, not its face. The people face tradeoffs principle is used in selling and purchasing securities (Bova, 2021). Jerome H. Powell, the chair of Federal Reserve governors, announced that the expansion policy would prevent the country’s financial system from collapsing (Hameed, 2022). The pandemic was distinguished by economic inequalities, which led to unequal distribution of opportunities and income among the members of the society.
The Federal Reserve devised monetary policy easing to prevent inequalities among different social classes. Policy easing aims to reduce falling inflation within the country, leading to unnecessary pressure on the government to improvise rescue plans. The Federal Reserve Board adopted an accommodative monetary policy (Hameed, 2022). The main aim of this policy was to increase the supply of money in the economy during the pandemic when people could not quickly get it. Many people in the United States require consumption loans, which is why the Federal Reserve started the monetary policy.
Treasury bonds, bills, and notes are the primary securities that fund the operations of a government. The primary dealers of these securities will be free to withdraw their shares from the government if an economic crisis occurs (Čekanavičius, 2018). Funding the primary dealers in Treasury bonds and bills earned the United States its economic power even if it had to spend. The Federal Reserve adopted a market-driven economy to achieve economic growth during the pandemic. Unemployment insurance was given considering consumer behavior. Additionally, subsidies to businesses depended on the products they traded. The Federal Reserve uses the relationship between inflation and unemployment in response to the pandemic.
The pandemic resulted in an economic crisis that pressured the primary dealers to withdraw their bonds from the government, leading to an economic crackdown (Holford, 2020). To sustain the country’s economy, the federal service extended the funding of the securities through repo operations. The federal marketing committee directed the repo operations on March 15, 2020. It repurchased them at higher prices ensuring the dealers did not go on a loss (Holford, 2020). The collateral agreement boosted the U.S. economy, ensuring money flow during the COVID-19 pandemic.
Fiscal Policies Adopted during the pandemic
Fiscal policy is the regulation of the economy through government spending and taxation. These are regulatory actions that bring a fluctuating economic situation into control. The pandemic resulted in a low economic growth rate in the United States, and the federal government had to adopt a fiscal policy to prevent collapse and inflation (Čekanavičius, 2018). This tool slowed down economic growth. Being a period of low economic growth rate, the Federal Reserve reduces the taxation rates imposed by the bank to increase borrowing activities and increase the money flow in the population (Mankiw, 2020). According to Mankiw (2020), the federal government has the ability to impact the performance and outcome of the market. The improvement is achievable through various channels, the country injected funds into the public through increased government spending. The U.S. Federal Reserve adopted the fiscal policies discussed below in the wake of the pandemic.
Analysis of Fiscal Policies Enacted by the Federal Reserve
The Federal Reserve adopted the expansionary fiscal policy to reduce the tax imposed on U.S. citizens and alleviate the economic turmoil caused by the accommodation, consumption, and travel pandemic. The policy was announced on March 23, 2020; it would increase spending and raise the nominal GDP, which had fallen by 8.9 % in the first quarter of the pandemic invasion (Holford, 2020). Cutting the three primary contact sectors led to a contraction in the economy. Increased unemployment resulted in a sharp decline in expenditure, and the country was headed to a recession (Čekanavičius, 2018). FOMC governor introduced subsidies in the consumption sector and funded the workers laid off through a government relief program to ensure they would be comfortable. To sustain their households, relief foods were also offered during the lockdown through the expansionary fiscal policy that ensured people from low social classes would endure the economic turmoil brought by the pandemic.
Even during the COVID-19 pandemic, local and foreign investors would buy U.S. treasury bonds due to their stability and power. In order to increase the money flow to the public, the Federal Reserve issued bonds to investors at relatively lower prices than average. Reduced taxation resulted in high government spending since the reserve repurchased the bond at higher prices (Čekanavičius, 2018). Owners of financial securities, therefore, benefitted through the funding and financed the economy resulting in steady economic growth and recovery from the shock of the pandemic.
Reducing taxation on products results in high demand and hence high expenditure. During the pandemic, the federal government reduced the tax on consumable goods. Consumer behavior changed since the demand for household commodities increased even with less income. According to Čekanavičius (2018), the tax collected during the first quarter of the epidemic was used to purchase emergency food subsidies to be distributed to people in lower social classes. The subsidies made the GDP remain unaffected even during the pandemic. An increase in disposable income led to a higher GDP due to increased spending within the country. Therefore, inflation fiscal policy to lower taxes was an appropriate emergency response in the United States since it directly impacts employment and production. High demand for the subsidized products resulted in overworking in the production companies leading to subsequent demand in the working personnel.
How Monetary and Fiscal Policy Negatively Affected GDP in the Long Run
Policies adopted by the Federal Reserve had a long-term negative impact on the U.S. economy. The economic principles promoted faster money flow to the economy, but their impacts led to slow economic growth in the subsequent years. Consumer spending has reduced considerably since the pandemic ended due to the stabilization of the economy. In the United States, consumer behavior has returned to normalcy while fiscal and monetary policies are still in action (Bova, 2021). The reduced spending has resulted in diminishing expenditure and hence reduced economic growth.
The level of GDP depends on the spending in the state and local governments. Pandemic response policies led to increased subsidies for businesses and private organizations’ Federal Reserve and economic growth due to the steady flow of money in the market. Regarding securities, policies that led to the funding of treasury bonds led to improved government spending.in the long run, the total money the federal and local states spent was fragile to impact the GDP (Čekanavičius, 2018). If the policies had not taken effect when the pandemic began, the level of GDP would be higher than the current.
Unemployment insurance, rebate checks, and increased government spending were temporary economic recovery strategies. Since the pandemic ended, these policies have ended, and their impetus has lessened. The chances of the United States reaching government spending are narrow due to stimulus policies. The level of GDP is projected to experience slower growth in 2023 due to fiscal policies put in place by the Federal Reserve. An overheated economy has followed the pandemic; hence, high interests are imposed on local and foreign investors. The taxes received from businesses have been reduced, affecting the flow of money in the economy and the GDP.
Why Unemployment Rate Dropped Despite Low Rates of Increases in GDP
Both monetary and fiscal policies have acted as a cushion to the blow of the COVID-19 pandemic by safeguarding the economy from collapse and preventing the adverse effects of inflation. The policies have acted as stabilizers that keep the economy afloat amid fluctuations in demand and supply. Also, the policies set by the Federal Reserve about spending and taxes have improved the economy since the pandemic began. Generally, based on the principles of macroeconomics “society faces a short-run trade-off between inflation and unemployment,” (Mankiw, 2020). This aspect implies that despite the impact of inflation in the country, job creation increased due to the demand for goods and services. However, monetary and fiscal policies act as a stimulus that produces positive short-term effects on economic growth. The long-term impacts of emergency policies are adverse and are currently being felt by nations after the pandemic (Pooter et al., 2020). The United States Federal Reserve enacted policies to govern taxation, unemployment, demand, supply, and spending. The output when monetary and fiscal policies are employed is lower than when they are not employed. The monetary and fiscal policies aimed to maintain the currency’s value even with the inflation brought on by the pandemic. Promoting a steady flow of money in the economy reduced unemployment in the country. The Federal Reserve, therefore, introduced the repurchase rule to inject more funds into the economy and curb the high demand brought by the pandemic.
To prevent the high rate of unemployment that would occur as a result of the pandemic, the United States adopted unemployment insurance. The immediate impact of the insurance was an improvement in the country’s GDP since the flow of money in the economy improved impulsively. Three rebate checks and economic impact funds given to the vulnerable under fiscal policies led to economic growth in the first quarter of the pandemic.
Conclusion
The sharp fall in the Gross domestic product (GDP) due to the pandemic led to the introduction of monetary and fiscal policies to curb the economic turmoil. Expansionary fiscal policies, reduced taxation, and increased spending made the framework of the fiscal policies, while quantitative easing and target fund rates made the monetary policy. The monetary and fiscal policies have led to economic growth in the short run but have adverse effects in the long run. The negative impacts of the COVID-19 pandemic are expected to run till 2023.
References
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