Question

The Virus has been blamed for causing much economic havoc in the world and in the United States. In reality, much of the damage has been cause be governments using their police power to prohibit beneficial economic activities from occurring. Assume the Virus scare is over. You are Chairperson of the Federal Reserve System. What monetary policies would you implement to get the US economy improving and growing, if any. You must explain correctly and in detail what they are and how they would work. This means going into detail about their transmission mechanisms. You may choose more than one. You have to convenience your skeptical professor that you know what you are talking about.

Answer 1

As a Chairperson of the Federal Reserve System, to get the US economy improving and growing I would implement some following monetary policies that are mentioned below:

• After virus scare is over, then our primary focus will be on keeping support the markets that helps in banking functions. The function of banking system depend on the short term funding markets and banks deposit base to avail loan to the businesses. The deposits allow banks to keep functioning and depositors can continue to withdraw money and the banks can make new loans. The Fed will encourage to banks to hold additional loss-absorbing capital to prevent future bailouts including reserve requirement (i.e., the part of deposits that banks must keep as reserves to meet cash demand) because banks are holding more than the enough required reserves.

• Federal Reserve System will make sure that the Treasury bonds market of US is working properly or not. The U.S. government will need to borrow the funds to revive the economy of US again. The Fed will help to make it very lower for the U.S. government. The Fed will focus to restore treasury and mortgage-backed securities markets so that credit could continue to flow in the economy. The Fed will have to purchase more treasury securities, commercial mortgage-backed securities and government-guaranteed mortgage-backed securities in upcoming month. It will help to support smooth economic functions that lead to effective implementation of monetary policy.

• The Fed has cut its target for the federal funds rate i.e., near-zero interest rates it is the rate banks pay to borrow from each other overnight. This rate is a benchmark for other short-term rates and also affects longer-term rates that lead to lower the cost of borrowing on mortgages, home equity loans, auto loans and other loans but it will reduce the interest income that savers earn on their savings. Fed will have to keep rates low for a long period of time as forward guidance. Also, it can also buy longer-term government bonds to keep the interest rate on these bonds down whenever the government borrows more. This is only only focus on short-term interest rates but also targeting long-term rates as well.

• By using Term Asset-Backed Securities Loan Facility (TALF) the Fed will keep focusing to lend to households, consumers and small businesses by providing new loan facility to the holders of asset-backed securities which will include auto loans, home loans, personal loans, student loans and credit card loans. This facility will support to new credit program that will improve money supply in the market which lead to boost in the economy.