The US is the world’s biggest economy, and the Federal Reserve is the most prominent central bank. The impact of its decisions on market behaviour is felt not only in the United States but also in the rest of the world. Currently, the US economy is going through unprecedented inflation and may go into recession if the Fed does not take adequate measures. This is the first time since 2018 that the US central bank has raised borrowing costs. In addition, the Ukraine war is also pressurizing the economy. The short-term economic impacts of the war are limited for the US since its trade ties with Ukraine and Russia are modest, although the commodity price surge is resulting in higher inflation.
The impact of this inflation on Americans
According to most economists, this inflation is not a very big issue since they view it as a part of the pandemic’s impact on the economy, which overall has not been terrible. If that is the case, then it is not specific to the United States alone; the rest of the world is also in the same situation. Moreover, even though inflation was high in October, other figures like the increase in job opportunities and the surge in retail sales point to an overall good month for the US economy. Some economists believe that increasing prices will mean some households will start slowing their expenses on high-priced goods. Only if people had an increase in their wages could they adjust to the ongoing situation.
What steps is the US government taking?
More than any other major advanced economy in the world, the United States is still in a strong economic position. To maintain this position, the President's top economic priorities are combating inflation and lowering expenses.
To combat inflation, President Biden wants to lower expenses for people and reduce the federal deficit by requesting that big businesses and the wealthiest Americans pay their fair amount.
Republicans in Congress, led by Senator Rick Scott, have advocated for a new minimum tax on the middle class, which would leave less money in families' pockets on average per year by an estimated $1,500. Additionally, the Congressional Republican plan would put Medicare — along with Social Security, Medicaid, the Affordable Care Act, and other crucial programs for American families — on the chopping block every five years. This is in contrast to President Biden's plan, which includes strengthening Medicare by granting it the authority to negotiate prescription drug prices.
The impact of American inflation on other world economies
Undoubtedly, the impact of the US economy is so extensive on the fate of other world economies that even a minor change introduced by the Federal Reserve can have a resultant impact on any single individual who is not a citizen of America.
Concerns over inflation in Washington have the potential to affect markets around the world since U.S. demand propels economic growth in nations well beyond its boundaries. Therefore, the Fed cannot reduce demand to control price increases as the impact would be felt world-over.
Has America faced such economic disturbances earlier?
The current situation is meagre when compared to what America has gone through earlier. The American economy saw a severe drop during the Great Recession. A string of interconnected economic catastrophes struck the American and European banking sectors in 2008. The recession began as a result of the global housing bubble burst. Millions of mortgages and loans were stuck, and the bank sold its securities, called collateralized debt obligations. A series of large banks in the US and Europe collapsed, and many went bankrupt. Banks drastically tightened their lending policies, despite infusions of federal money.
Subsequently, President Barack Obama signed the American Recovery and Reinvestment Act of 2009; the bill provided $787 billion in stimulus through a combination of spending and tax cuts. The strategy is primarily based on the Keynesian notion that, during an economic downturn, government expenditure should balance out the decline in private spending; otherwise, the decline in private spending may continue and valuable resources, including unemployed work hours, will be squandered. Critics assert that because the government must borrow money from the private sector to supplement its expenditure, it cannot make up for a decline in private spending. However, the majority of economists do not believe that such "crowding out" is a problem in an environment where interest rates are low and the economy is sluggish. The government debt and potential future inflation issues brought on by such significant spending are also mentioned by opponents of the stimulus.
The economic impact of COVID-19 on the US market
The COVID-19 epidemic has had a significant negative economic impact on the US, negatively affecting employment, shipping, financial markets, tourism, and other businesses. The effects can be ascribed to consumer and company behavior that reduces exposure to and spread of the virus as well as government involvement to limit the virus (including at the federal and state level).
The real GDP shrank by 3.5 percent in 2020, the first such decline since the 2008 financial crisis. Millions of employees lost their jobs, which resulted in record-breaking numbers of applications for unemployment insurance over several weeks. Numerous companies, particularly restaurants, closed their doors as consumer and retail activity declined. To prevent the spread of COVID-19 at the office, several companies and offices switched to remote work. The American Rescue Plan Act of 2021 is one of the laws established by Congress to offer stimulus and lessen the impact of job losses and workplace closures. To maintain the integrity of the financial markets and to stimulate the economy, the Federal Reserve cut the federal funds rate goal to almost zero and implemented several liquidity tools. Inflation started to rise to levels last seen in the 1980s in late 2021.
The recovery from the recession began relatively quickly, with the recession only lasting one quarter, according to the NBER. As of 2022, the unemployment rate has reached its pre-pandemic levels. Nevertheless, in many key aspects and industries, the US economy has not completely recovered from the COVID-19 labor pandemic.
The US Department of Labor recently revealed that consumer prices have increased by 7.5 percent over the past year. This rate is the highest recorded in 40 years in the country. The increasing cost of labour, shortage of products and services, and supply chain headaches have contributed to the inflation on the availability side of the equation.
The current economic problem that the USA is facing is not a very big issue, but if it won’t be curtailed at this stage, then it may affect other major world economies. The government of the USA and the Federal Bank have already realized this fact and are taking measures to prevent a major mishap. Meanwhile, other countries suffering should find a way out of this. And Americans, at this time, should support and show trust in the government's economic policies.