Monetary policy is used to mitigate economic recessions, especially by controlling inflation. The basic logic is that the Federal Reserve conducts the policy, controlling the money supply and interest rates to stabilize the economy. Money supply and interest rates are inversely related. In a state of stagflation, like what the U.S. is currently experiencing, monetary policy doesn’t seem to work that well. 

According to CBO, the federal budget in the fiscal year 2020 was $6.6 trillion, including $473 billion in unemployment compensation. 2020 was the year when COVID-19 struck the world devastatingly; many people lost their jobs. The Federal Reserve had to increase the money supply and low-interest rates to facilitate the issue. The unexpected pandemic plunged the economy and accelerated the arrival of the impending economic crisis. How? By increasing the money flowing in the market, the value of money will go down, and prices of products will rise. The original intention was to mitigate the ill effects of COVID-19 by incentivizing people to purchase more merchandise, but it somehow backfired. “Over the 12 months from January 2021 to January 2022, the Consumer Price Index for All Urban Consumers rose 7.5%. This is the largest 12-month increase since the 12-month period ending February 1982.” The data reveals that inflation in the U.S. was already severe; in other words, money is losing value. The inevitable drastic elevation of CPI made the Federal Reserve decide to raise the interest rate. “The Federal Reserve approved the largest interest rate increase since 1994 and signaled it would continue lifting rates this year at the most rapid pace in decades as it races to slow the economy and combat inflation that is running at a 40-year high.” After raising the rate, the interest rate increases, more people will be saving money than lending money, and there’ll be fewer U.S. dollars on the market. When something is scarce, its value inversely gets higher. The U.S. dollar, in this case, will appreciate, currencies from other countries will depreciate, and more people will convert money into dollars and invest in the U.S. The aim is that the U.S. can use the money from investors worldwide to construct itself, thus having a greater economy.

In this case, things are a bit different. Since the U.S. government is still providing financial assistance to citizens, some fewer people want to work, although the COVID-19 is more like the flu now. When the inflation and unemployment rates go up, stagflation comes into play. Prices of commodities are rising, but the economy remains stagnant. There is weak demand. Theoretically, the inflation rate and unemployment rate are inversely-correlated. Everything was seemingly proceeding in the right direction, but Russia suddenly invaded Ukraine. As the most powerful country in the entire world and the core member of NATO, the U.S. stood with Ukraine and denounced the impulsive action taken by Russia. Seeing that the U.S. is supporting Ukraine and threatening to sanction Russia, Putin decided to cut down oil and gasoline supply. This led to the rise of gas prices around the states. The oil crisis is just one of the causes. The earlier lockdown in Shanghai plays a part in this stagflation. China is the most important manufacturer and industrial producer in the world. Shanghai, one of the economic centers of China, has been halted for 3 months. Many big American corporations have factories in Shanghai, such as Tesla and Apple, and the lockdown largely impacted them. This added lots of pressure to keep the corporations functioning, leading to job cuts. This ties back to the earlier mentioned unemployment rate escalating. 

All the factors add together which can now explain why the US is in an awkward economic status. The classical monetary policy does not seem to show its capability in this instance. But again, no one foresees the coming of COVID-19; no one knows what will happen. The pandemic abrupts normality, and there seems to be no perfect solution.The miscalculation and misjudgment of the market lead the U.S. into a dilemma. Right decisions but wrong timing.

                                                                Citations

“CPI Home : U.S. Bureau of Labor Statistics.” Www.bls.gov, www.bls.gov/cpi/#:~:text=Consumer%20prices%20up%207.5%20percent%20over%20year%20ended. Access 1 July 2022.

Timiraos, Nick. “Fed Raises Rates by 0.75 Percentage Point, Largest Increase since 1994.” Wall Street Journal, 16 June 2022, www.wsj.com/articles/fed-raises-rates-by-0-75-percentage-point-largest-increase-since-1994-11655316170?tpl=cb. Access 1 July 2022.

“The Federal Budget in Fiscal Year 2020: An Infographic | Congressional Budget Office.” Www.cbo.gov, 30 Apr. 2021, www.cbo.gov/publication/57170.

Access 1 July 2022.