Did the Fed Help Cause the 2001 Recession?
Real GDP was essentially equal to potential GDP during the first quarter of 1999, but rose to 4.2% above potential GDP by the second quarter of 2000.With real GDP above potential GDP, the inflation rate began to increase. The inflation rate as measured by the CPI increased from 1.7% during January 1999 to 3.7% during June 2000.
The Fed responded by increasing the target federal funds rate from 4.75% in January 1999 to 6.5% in May 2000.
The last increase in the target came after the dot-com bubble burst and all major stock indexes started to decline. By March 2001, the U.S. economy had entered a recession that worsened after the terrorist attacks on September 11, 2001, led households and firms to reduce consumption and investment. The recession was short, ending in November 2001, but the economy recovered slowly, and real GDP was 1.9% below potential GDP as late as the first quarter of 2003. Did the Feds decision to increase the federal funds rate contribute to the recession and the slow recovery? Use the ISMP model to show the effect of the Feds policy.
When an economy continues to grow, inflation builds up .In reaction to the higher inflation rate, the Fed puts the brakes on growth by increasing interest rates.The outcome is a recession that erases the issue of inflation, but leads to an increase in the unemployment rate. In the 1990s, the Fed fine-tuned the economy and the Goldilocks economy cam einto being. 1993 – 2001, the U.S. economy experienced a period of uninterrupted economic growth. When recession hit in 2001, the main cause was not higher inflation but excess capacity in…
y. For the first time since the 20th Century, the U.S. experienced an Investment-led recession. With the start of the 2001 recession, inflation remained at a low level and the Fed was rapidly lowering interest rates. But, due to excess industrial capacity, corporate did not increase investment as rates fell, rather, they kept onreducing investment in new capital