Question

Explain the most recent monetary policy move by the Fed. Is this expansionary or contractionary policy? Why did the Fed choose to pursue this policy? What impacts of this policy do you observe? For best results, look up recent FOMC announcements.

This must be a real-life response regarding the United States.

Answer 1

The most recent Fed action is cutting the federal funds rate to a range of 0 -0.25 %. Federal funds rate us the policy rate and one of the major policy tools used by the Fed. The move is expansionary in nature as it will act as an incentive for banks to lower the rates of interest charged on lending and stimulate the economy. the Fed has done this amidst the widespread economic loss caused by the COVID-19 pandemic. Millions have lost jobs and all major work is shut. People are seeing much lower income and layoffs and thus reducing consumption. This negative demand shock reduced the level of output and is bringing the economy close to recession. The Fed is trying to stimulate the economy by a big monetary boost which lowers the constraints for borrowers and gives them some liquidity. The policy is expected to work for a lot of small scale businesses and individuals who are in need of urgent funds as their profits have vanished. Although, the impact is debatable. Rates cut can not bring back workers in factories or raw materials from a nation where all travel is now restricted. Fiscal policy is indeed morec rucial in the fighting the situation now.