Question

Assume that you are one of Fed governors working with Fed Chairman Powell on monetary policy. What will be your advice on interest rates to him? Would you decrease the Federal Fund Rate in the coming months with a concern that the economy is in a recession?

Answer 1

As we know that Coronavirus has originated from Wuhan China in 1 December 2019.The COVID-19 is related with SARS-CoV-2 virus. The WHO has declared it pandemic on 11 march 2020. The COVID-19 has  impacted 189 countries and territories of the world. US of America is the worst affected country of the world with most number of deaths and positive cases. The ongoing COVID-19 pandemic was confirmed to have reached the United States in January 2020. The first confirmed case of local transmission was recorded in January, while the first known deaths happened in February. By the end of March, cases had occurred in all 50 U.S. states, the District of Columbia, and all inhabited U.S. territories except American Samoa. As of May 27, 2020, the U.S. had the most confirmed active cases and deaths in the world. As of June 19, 2020, its death rate was 361 per million people, the seventh-highest rate globally.

The Fed is the central bank of US of America. The current chairman of Fed is Jerome powell. The fed plays an important role in controlling the inflation and saving the country from the recession. I as ,one of the governors of fed would like to put my suggeestion regarding the ongoing recession. I would like to make use of lower interest rates, to control the recession. The interest rate cut will make the availabilty of credit to public largely. The federal funds rate is a benchmark for other short-term rates, and also affects longer-term rates, so this move is aimed at lowering the cost of borrowing on mortgages, auto loans, home equity loans, and other loans, but it will also reduce the interest income that savers get. At the lower rates of interest the economy will gain maximum level of employment and price stability goals. I would also suggest , resume purchasing massive amounts of securities, a key tool employed during the Great Recession, when the Fed bought trillions of long-term securities. Treasury and mortgage-backed securities markets have become dysfunctional since the outbreak of COVID-19, and the Fed’s actions aim to restore smooth market functioning so that credit can continue to flow.

The primary dealer credit facility should be provided, to offer low interest rates loans (0.25) upto 90 days for the 24 large financial institutions know as primary dealers. The dealers will provide the Fed with equities and investment grade debt securities, including commercial paper and municipal bonds, as collateral. The goal is to keep the credit markets functioning at a time of stress when institutions and individuals are inclined to avoid risky assets and hoard cash, and dealers may encounter barriers to financing rising inventories of securities they may accumulate as they make markets.

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