If you were an economic adviser at the Fed, what should be the monetary policy in...

If you were an economic adviser at the Fed, what should be the monetary policy in the next six months-expansionary (continued low-interest rates and/or additional QE) or contractionary (starting to slowly raise interest rates)?

Expert Solution

Solution

In the current scenario the Corona virus outbreak will have an adverse effect on the US economy.The demand and supply side both will be hit .There will also be a decrease in growth projection for GDP.If this scenario continues for some time market can enter a recessionary phase and it will also lead to unemployment issues

Therefore it is imperative that similar to 2008 crisis the interest rates be kept between 0 and .25 so that more people take loans and invest in business ,increase purchasing so that it spur economic activity and also help in increasing emplyement.

Secondly due this outbreak there will be liquidity issues in market so it is imperative that liquidity is injected in the system .This can be done if the fed buys securities and other financial instruments from the market .This will further help in increasing the economic activity.

Thus as an advisor I would suggest to hold the rates between 0-.25 and also go in for Quantitative easing

Rahul Sunny answered 8 months ago

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