Fed Policymaking

George W. Bush was sworn into office as the 43rd President of the United States on January 20, 2001. On September 11, 2001, terrorists hijacked four commercial passenger jet airliners killing thousands of innocent people at the World Trade Center in New York City and at the Pentagon in Washington, D.C. In 2002, there was a wave of corporate scandals including the Enron collapse, the bankruptcy of WorldCom, and the federal investigations of Tyco, Qwest, Global Crossing, ImClone, and Adelphia. On May 28, 2003, President Bush signed a ten-year $350 billion tax cut package that was the third largest in U.S. history. Each one of these events between 2001 and 2003 affected the economy in some way. Because of this, I have chosen to examine and discuss in this paper economic growth as measured by real gross domestic product (GDP), the price level, interest rates, and the targets and goals of monetary policy.

Table 1.1.0 depicts the percent change from preceding period in real gross domestic product (GDP) for personal consumption expenditures, gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment. Table 1.1.1 also shows the percent change from preceding period in real gross domestic product but is illustrated in a chart to see the changes in each quarter (U.S. Department of Commerce, Bureau of Economic Analysis, 2011).

Economic growth is measured as a percentage change in GDP, which is "the market value of all final goods and services produced in a country during the course of the year (Mishkin, 2010, p. 21). The economy had its weakest performance in 2001 in over a decade. Table 1.1.1 displays this information on a quarterly basis. In the first half of the year, real GDP increased at an annual rate of ¾ percent and then declined in the second half by ½ percent. In 2002, the economy had an upturn and GDP increased 2¾ percent throughout the year. "However, the pace of activity was uneven over the course of the year, as concerns about emerging economic and political developments at times weighed heavily on an economy already adjusting to a succession of shocks from previous years (United States. Federal Reserve Board, 2003). By 2003, the economy strengthened and real GDP increased at an average annual rate of 6 percent in the last two quarters compared to only an average rate of 2½ percent increase between late 2001 and mid 2003. GDP is often used as an indicator of the economic health of a country so by the third quarter of 2001 and into 2002 the nation was in a recession. By the end of 2003, improvement was on the rise.

The price level is the average price of goods and services in an economy. The three measures of the price level that are used in economic data are the GDP deflator (nominal GDP divided by real GDP), the PCE deflator (nominal personal consumption expenditures, PCE, divided by real PCE) and finally the consumer price index (CPI). The consumer price index is most frequently reported in the press, which is measured by "pricing a "basket" of goods and services bought by a typical urban household" (Mishkin, 2010, p. 22).

Table 1.1.0: Percent Change From Preceding Period in Real Gross Domestic Product

Bureau of Economic Analysis

Last Revised on: June 24, 2011 - Next Release Date July 29, 2011

Line 2001 2002 2003

1 Gross domestic product 1.1 1.8 2.5

2 Personal consumption expenditures 2.7 2.7 2.8

3 Goods 3.1 4.1 4.6

4 Durable goods 5.4 7.6 6

5 Nondurable goods 1.8 2 3.7

6 Services 2.5 1.9 1.9

7 Gross private domestic investment -7 -1.4 3.6

8 Fixed investment -1.9 -4.2 3.2

9 Nonresidential -2.8 -7.9 0.9

10 Structures -1.5 -17.7 -3.8

11 Equipment and software -3.2 -4.2 2.5

12 Residential 0.6 5.2 8.2

13 Change in private inventories --- --- ---