Question

How does the Federal Reserve stimulate the economy? When faced between continued stimulus to stimulate the economy and the potential inflationary pressure of rising oil prices, what can the Fed do and what do you think the Fed should do?

Answer 1

When Fed wants to stimulate the Economy,it lowers the interest rate , people borrow more spend more , Federal Reserve is to encourage more landing & investment to stimulate the economy, Federal Reserve chair Nominee Janet Yellen emphasized that one of the Federal Reserves primary duties is to pursue its dual mandate for Maximum employment & stable prices.The interest rate on the loan is on the loan is federal funds rate, Fed targets the federal funds rate which is determined by the supply & demand for reserves. When fed increases & decreases its target federal funds rate,generally that increases of decreases interest rates .Increase in spending In economy changes in the interest rate in business,consumption,investment & construction of new housing which stimulates the economy & increases output & employment. At first Fed creates more reserves to purchase financial assets which tends to rise prices , further increases stock values during Quantitiative easing, resulting in wealth tends to stimulate more spending. Quantitiative easing also puts downward pressure on exchange rates which stimulate to increase exports & decrease imports as a means of Stimulating economy. large increase in bank reserves tend to increase in inflation to stimulate economy, increase in inflation lowers real interest rates that stimulate Business investment , housing & consumption durables.

The move up for oil comes in countries , Federal reserve announced purchase an unlimited amount of treasury & mortage backed securities to support functioning of financial market in the recent pendamic COVID-19, oil has been unable to escape this pressure, what is important that how much of contraction we could see in oil demand. Fed needs to move soften potential economic disruptions due to the virus , which could help prop up oil demand. Lower rate could eventually reduce costs. The pledge for unlimited bond purchases and other liquidity boosting help to stabilize the markets, during this corona virus outbreak and the oil shock, critical to see both side , monetary & fiscal policy stimulus come together to coordinate. The economic impact is severe , but the faster it stops the quicker its recovery.