Question

1. Make a list of what the Federal Reserve (Fed) has done in response to the COVID-19 crisis using 31 March 2020 as the cut-off date. [Please do not include fiscal responses in your list]

Answer 1

The Corona Virus Pandemic has caused a lot of trouble in terms of public healthcare across the United States. With a lot of people dying because of the disease, the government has had to take strict measures of lock-down which have ensured that the numbers do not soar any further.

However, the economic implications of the disease are such, that it is surely going to lead to a global recession as demand slows down and jobs are lost. To correct this, the Federal Reserve of the United States has taken several measures aimed at easing the economic tensions and ensuring that the economy can be allowed to function normally.

Some of the critical functions taken are as follows: -

1) Reducing the Federal Funds Rate

The Federal Funds rate is also known as the discount rate. It is the rate at which commercial banks can take loans from the Federal Reserve. These rates ultimately determine the rate at which commercial banks give out loans to other players in the market.

The Federal Reserve reduced the Federal Funds rate to 0.25% which now allows for easier credit to be passed on to the consumers.

2) Securities Purchase also known as Easing: -

Another key strategy followed by the Federal Reserve is to purchase back government bonds which will allow for higher amounts of money readily available with banks for giving out as credit to consumers and the broader industry at large.

The Federal Reserve promised to purchase as much as "$500 billion in Treasury securities and $200 billion in government-guaranteed mortgage-backed securities". Later it was decided that this purchase would be open ended as on 23rd March and the amount may further be revised.

3) Relaxing the Cash Reserve Ratio

The cash reserve ratio is the minimum percentage of money which the commercial banks must hold at any given point of time with the federal reserve so as to be able to operate in the markets.

The Cash Reserve Ratio was slashed by the Federal Reserve temporarily and banks have now been given a free hand to not deposit anything in the reserve and be able to give away as much as credit as they need. This is possible only due to the fact that the banking system has matured after the 2008 crisis which happened in the country

4) Direct Lending for Companies with Low Employees or Turnover

To ensure that job loss can be curtailed as much as evidently possible, the Federal Reserve has opened up direct lending facility for those companies which have an employee base of less than 10,000 employees or have revenues of less than $2.5 billion.

The Federal Reserve will provide banks with 95% of the amount needed for such reimbursements and the loan period would be up to 4 years. Out of which 1 year of payments can be deferred.

What this means for the overall industry is that it can enjoy free loan for up to a period of 1 year and still be able to pay of its employees. The Fed set aside 75$ Billion for this cause.

5) Forward Guidance and Prediction: -

Another key aspect which is used by the Federal Reserve is that it has guided or told the market that in the months to come, it would take similar measures to ensure that the economy may return to its original levels. This helps in maintaining investor confidence and ensuring that the market remains relatively stable over the years.

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