Is the US government dialing back on their recessionary stimulus measures too slowly?

Is the US government dialing back on their recessionary stimulus measures too slowly?
Written by: Maya Flynn

During the 2008 recession the US government implemented economic stimulus to bring back economic activity. Two of the main ways that they did this was buying bonds and dropping the overnight lending rate. The Fed sets the lending rate, which is essentially a baseline for many other borrowing rates for things such as loans and mortgages. The drop in the lending rate helped create economic activity because there was more investment being made when there was low interest. As for the bonds that were bought, it put more money into the flow of the economy and helped businesses. Having these two strategies were key in getting the economy back on track.

The remaining problem is, now that we are out of the recession, the Fed has to put things back to where they were. If they put the lending rate up to fast it will freeze investors and create more problems for the economy. However by leaving it down, there is a risk for creating lots of inflation. In past recessions we got out of it with a surge of activity where the government could jump it back up;however, this recovery has been slow and gradual which is why the rate came up slowly. This isn’t necessarily bad because it means that our economy is pretty stable, but it leaves problems with the rate. Now after 10 years the rate has made progress to get back up to a safe point, but it still isn’t there yet. “The Fed has slowed down their plan of raising the rate to make sure they don’t contribute to the slowing of the economy.  If the current predicted slowdown does occur, there are expectations that they will need to move the rate lower again towards the end of this year. They will be very hesitant to do this as their ultimate desire is to get the rate higher than it is now”(Forbes). The Fed has also stated that they will manipulate the market to keep the inflation at 2% to give investors and businesses confidence and set the expectations for the economy. Having the rate all the way up would give further security because if there is another bad recession there would be room to drop the rates to help again, without dropping them too low.

Additionally the bonds that the government bought remain a problem. The Fed bought 4.5 trillion dollars in bonds, and have only made back 1 trillion so far. If they do this too quickly they will pull too much money out of the market and cause a crash. They have been doing it gradually at 50 billion per month, but beginning in 2019 they have been dialing that back. The concern is that after 10 years the government is still missing 3.5 trillion dollars. If there is a recession again soon, the government will be limited in the amount they can buy so they don’t have overwhelming debt.

This is a cause for concern because the economy is showing signs of slowing again. If another recession occurs the government isn’t in a great position to take measures to fix it. On the other hand, if they rush the process to get back to a safer spot, they will at least cause problems if not a recession. So overall what they are doing is playing it safe and taking slow, which leaves risk for a recession.

Works Cited

Rapoza, Kenneth. “2019 Will Be A Tough Year For Trump And His Economy.” Forbes, Forbes Magazine, 11 Dec. 2018, www.forbes.com/sites/kenrapoza/2018/12/11/2019-will-be-a-tough-year-for-trump-and-his-economy/.

Bartash, Jeffry. “A Strong, Improving Jobs Market Outweighs All the Bad News Recently on the Economy.” MarketWatch, 4 Mar. 2019, www.marketwatch.com/story/all-the-bad-news-on-the-economy-cant-overshadow-where-the-real-strength-lies-2019-03-02.

Sage, Alexandria. “Fed's Powell Says No Immediate Policy Responses Needed to Economy.” Reuters, Thomson Reuters, 9 Mar. 2019, mobile.reuters.com/article/amp/idUSKBN1QQ032.