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Posted on September 4th, 2012, by

In the contemporary business environment, the state regulation of the national economy and basic economic processes is considered to be one of the efficient ways of overcoming the current economic recession. The active interference of the state in the macroeconomic development of the national economy, especially the focus on the regulation of the inflation, unemployment and GDP growth rates, is an important condition of the stable development of the national economy. Such a view on the economic development and state regulation is, to a significant extent based on the Keynesian views on economy and economy development. At the same time, this approach has a number of critics, while the efficiency of the state regulation and interference in the economic development can be challenged. In this respect, it is possible to refer to the article “Fed Leaves Interest Rates Unchanged”¯, published in New York Times in 2007, when the economic recession was just about to start. In fact, the analysis of the article, which is focused on policies of the Federal Reserve and its efforts to restrain inflation rates, and the later development of the USA reveal the low efficiency of the government policies and Fed’s efforts to regulate the inflation rate and the economic development at large.

In actuality, the article focuses on the policy of the Fed as the main regulatory body which is responsible for the financial stability of the USA. In fact, the Fed traditionally aims at the regulation of the development of the financial market and the banking system in order to maintain the stability of the national currency, i.e. the US dollar, to avoid rapid deterioration of financial situation and regulate the inflation rate. In this respect, it should be said that the Fed have powerful tools to control and regulate the inflation rate and the article reveals the attempt of the Fed to slow down the inflation rate through the regulation of the interest rate.

To put it more precisely, the Fed decided to stay the inflation rate steady at the level of 5.25% and, according to the article, this measure was supposed to extend a yearlong breather for borrowers (Fed Leaves Interest Rates Unchanged, 2007). In other words, this measure was supposed to facilitate the position of borrowers and restrain the inflation rate which had started to grow substantially in 2007. In such a situation, the regulatory policies of the Fed seem to be quite logical since the attempt to decrease the inflation rate was quite logical, when its growth started to threaten to the stability of the national economy.

At the same time, the article reveals the fact that the price of strategically important products, such as oil grew, but the growth had slowed down, although the oil price remained high. In this respect, it is possible to speak about the external impact on the national economy of the USA, which the Fed should take into consideration, while developing its policies. Nevertheless, the maintenance of the interest rate primarily aimed at the financial stability in the USA and decrease of the inflation pressure on the national economy.

In such a context, it is necessary to take into consideration possible effects of the Fed regulatory policies. In fact, the Fed had and always haw several options to regulate inflation. First of all, the Fed can increase the interest rate, which is normally done when the national economy is “overheating”¯. In such a situation, the high inflation rate discourages borrowing, which, in its turn, decreases the level of consumption. Alternatively, the Fed can decrease the interest rate to encourage borrowings and consumption. This measure is normally undertaken when the national economy suffers from a recession because the low interest rate allows borrowers to take money at low interest rates in banks. As a result, cheap credits stimulate business activities and consumption that naturally contributes to the revival of the national economy.

However, the article shows that the Fed had taken the intermediate position and preferred to keep the interest rate steady, when the economic situation in the USA started to deteriorate. At this point, it is again possible to speak about the impact of the external factor, namely the oil prices, which stabilized and even decreased slightly. Probably, such a trend in the change of the oil prices influenced the decision of the Fed to stay the interest rate unchanged. On the other hand, it was obvious that the gasoline price still was very high and in many states it exceeded USD 3 per gallon (Fed Leaves Interest Rates Unchanged, 2007). AsĀ  a result, the seeming stabilization of the oil prices probably was one of the major indicators of the inflation stabilization, but the persistent high oil prices affected the economic development of the USA consistently and the Fed should forecast the impact of the high oil prices on the national economy even when the oil prices stopped to grow.

In other words, the Fed should probably start decreasing the interest rate in order to discourage the inflation even more in 2007 and to assist the national economy to cope with the upcoming problems. However, the later experience and policies of the Fed in 2008 proved to be not very efficient in regard to overcoming the inflation and financial crisis in the USA. Basically, the policy of the Fed in relation to the interest rate turned out to be not very successful because, even when the Fed started to decrease the interest rate consistently, it did not bring positive effects on the financial market. In such a context, 2007 was very important as the year that preceded a profound economic recession and probably the Fed should conduct different policies in relation to the interest rate.

Nevertheless, the article reveals the overall ineffectiveness of the Fed policies as well as the state regulation at large. In fact, on analyzing the Fed policies in the context of the economic recession in the USA, it becomes obvious that the Fed as well as the Government failed to prevent the economic recession. In this regard, it is important to lay emphasis on the fact that the interest rate was apparently not the only factor that influenced the economic recession in the USA. Moreover, it was not even a determinant factor that could change consistently the economic situation in the USA. It proves beyond a doubt that the economic recession in the USA was provoked by objective marketing factors and the article give insight to one of such factors ”“ the high oil prices. Obviously, the high oil prices influenced the economic development of the USA consistently since the oil prices contributed to the rise of the inflation rate. In such a context, the unwillingness of the Fed to decrease the interest rate may be viewed as a reason for criticism of the Fed. But such criticism should also take into consideration other factors that led to the economic recession in the USA and a profound financial crisis, among which it is possible to single out the mortgage crisis. The latter was apparently provoked by the galloping price in the housing market. In this regard, the decision of the Fed was not absolutely illogical. Instead, it aimed at the maintenance of stability in the financial market since it was impossible to keep housing prices rising, when they had already reached an exorbitant level, while the growth was likely to occur in 2007 if the Fed lowered the interest rate consistently encouraging new borrowings.

Thus, taking into account all above mentioned, it is possible to conclude that the article “Fed Leaves Interest Rates Unchanged”¯ reveals the fact that the regulatory policies from the part of the state are not always efficient. Moreover, the modern economy is highly dependent on the multitude of factors which the Government of Fed cannot foresee or prevent. In such a situation, the Government and Fed can only respond to challenges imposed on the national economy by the domestic and international market situation. Nevertheless, the state policies can still either minimize or maximize negative effects of the economic crisis depending on the steps being undertaken by the Government and Fed.

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