Question

Discuss the FED monetary policy with respect to the current economic situation at the domestic and international levels. Imagine being an economic consultant of the FED and advise the chairman with the best monetary strategy for the next year in less than 500 words. Support your viewpoint with data, analyses and empirical evidence.

Answer 1

Most global economies in 2020 are going through a situation of extreme recession. The core reason for which is that establishments remain shut, and the overall demand for goods and services except for essential ones such as food has gone down drastically. The end result of this, is that the Federal Reserve requires significant steps to be taken in order to ensure that the economy of the United States can stay stable and recession can be controlled as much as possible.

The following is the best technique to be followed by the Federal Reserve to ensure that the economy remains stable, While there are other available options, the core reason as to why this is best is because it directly impacts consumption and production which are lacking due to the virus and require a significant push so as to maintain equilibrium in the society at large.

Reducing Interest Rates: -

The Federal Funds Rate is the rate at which is the rate at which it grants loans to the commercial banks. In return, the net result is that the commercial banks would also reduce the interest rates which they charge from consumers and producers. The Aggregate demand then would go up as people would get loans at relatively cheaper rates and would be able to satisfy their needs by consumption.

The current Federal Funds Rate was reduced to 0.25% which is largely seen as a correct thing to do. In the next year or so, the Federal Reserve must closely watch this trend and try to reduce the impact of the recession on the general public as far as possible as low interests are and added advantage for the consumers and producers to keep consumption stable.

The Interest Rates are critical at deciding the consumer and producer mood. When the interest rates are lowered, the consumers get the signal that they can now spend more money at lesser costs than they earlier used to. For example, if the earlier interest rate in an economy was 10% and reduced by 5%, the consumers would have to pay much lesser to the banks over the years on their consumption.

Thus, in my opinion this is the best technique of managing the economy during this time of critical crisis and will help in bouncing back relatively quickly as demand remains stable, and producers try and increase and expand operations.

As far as emperical evidence for this is concerned, we see that since 2008, every time during a recession, the interest rates have been lowered by the Federal Reserve and the consumption patterns have increased over time with the simple logic that cheaper loans promote aggregate spending in any economy.

Please feel free to ask your doubts in the comments section.