Fiscal and Monetary Policy Actions in the Short Term America
Recent economic developments in the United States of America (USA) have brought up the interaction between fiscal and monetary policy. The US economy experienced a major contraction in 2020 due to the coronavirus epidemic, but entered a rapid recovery period in 2021. Behind this recovery lie the expansionary fiscal and monetary policy measures taken by both the government and the central bank (Fed).
The government has announced financial stimulus packages worth approximately $6 trillion in 2020 and 2021 to reduce the economic and social effects of the epidemic. These packages include items such as income support, unemployment benefits, tax relief, infrastructure expenditures, and health expenditures. The government's financial incentives increased both consumer and investor confidence, as well as revived economic activity.
The Fed, on the other hand, has kept its monetary policy extremely loose since the outbreak began. The Fed kept interest rates close to zero, expanded its asset purchase program and provided liquidity to financial markets. The Fed's monetary policy stance reduced credit costs, improved financial conditions and supported economic growth.
However, the rapid recovery in the US economy also brought some risks. The most important of these is inflation. The consumer price index (CPI) in the USA reached its highest level in the last 30 years, exceeding 6 percent in 2021. Among the main reasons for the increase in inflation; increase in demand, supply constraints, rise in commodity prices, base effect and deterioration in expectations.
The rise in inflation complicates the coordination between fiscal and monetary policy. The government is working on new fiscal stimulus packages to further stimulate the economy. However, these packages are likely to increase the budget deficit and public debt, as well as increase demand pressure and inflation. The Fed, on the other hand, argues that the increase in inflation is temporary and does not hurry to tighten its monetary policy. However, the markets are pricing in that the Fed will start raising interest rates sooner in order to control inflation.
In this case, a mismatch may arise between fiscal and monetary policy in the US in the short run.