Federal Reserve Policies 2000- the First Decade Essay

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Federal Reserve Policies 2000-

The first decade of the 21st century saw the U.S. economy on a peripatetic through tumultuous events, euphoric highs, and abysmal lows. The ten-year window highlighted three periods: 2000-2004, 2004-2007, and 2007-2010 in which the Federal Reserve actively utilized their policy levers to achieve their dual policy mandate of full employment and low inflation. The Fed's policy bag includes: the Fed funds rate, open market operations, discount rate, reserve requirements, and margin rates all of which were utilized during these three periods to achieve the ostensible goals of Fed policy. It is worth noting that in each of the three periods the Fed responded to economic conditions which they perceived to be harbingers of either inflationary pressures or anemic GDP and employment growth.

2000-2004

On March 10, 2000 the NASDAQ composite, a stock index representative of high flying dot-com companies, peaked at 5048 (Zarroli, J. March 10, 2010). From that point the technology laden index collapsed and along with it the bubble of inflated valuations. The economy overall began to slow with GDP growth falling and eventually leading to an eight-month recession beginning in March of 2001 and ending in November of 2001 (USA Today.com. July 17, 2003). Amidst this backdrop the nation and the economy also suffered a devastating blow on September 11, 2001 with the terrorist attacks on New York and D.C. The Federal Reserve which had targeted its Fed funds rate at 6.50% in May of 2000 began a loosening of monetary policy in early 2001 with a series of 50 and 25 basis point reductions in the target rate (Federal Reserve.gov. N.D.). The Fed funds rate is the rate at which banks lend overnight deposits to other financial institutions.

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The Fed in targeting a rate uses open market operations to inject liquidity into and out of the monetary system. The slowdown in the economy prompted Fed policy makers on the Federal Open Market Committee to conduct an expansionary monetary policy in order to ameliorate the effects of an economic slowdown. A lower Fed funds rate facilitates greater lending, and coupled with an injection of monetary reserves via bond purchases allows for the banking system to increase credit to business and consumers. The rate fell steadily from 6.50% in May of 2000 to 1.75% in December of 2001 (Federal Reserve.gov. N.D.). The rate reductions allowed the economy to pull out of recession in late 2001 and begin a resumption of growth into 2002.

Of course monetary policy was not the only prescription which the economy received after the dot-com bubble imploded; fiscal policy tax cuts under President Bush set the stage for greater growth. The Fed after its successive rate cuts sat back to perceive what impact its rate cuts would have on the economy. While GDP resumed an upward trajectory the unemployment rate indicated a jobless recovery; from 2000 to the end of 2003 the unemployment rate increased from four percent to six percent (Bureau of Labor Statistics.gov. N.D.). The Fed stayed put on monetary policy through most of 2002 until a wave of accounting scandals rocked the financial community and put a damper on economic growth. The Fed responded with a 50 basis point reduction in November of 2002 and a 25 basis point reduction in June of 2003, bringing the target Fed funds rate to 1.00% (Federal Reserve.gov. N.D.).

Concomitant to this decrease in the Fed funds rate.....

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