Question

What are some reasons the Fed may change interest rate targets? Why did the Fed cut interest rates sharply in the Great Recession and again in early 2020? What is the Fed's current interest rate policy and what connection does this strategy have with current economic conditions? What are the mandates of the Federal Reserve and how does interest rate policy help the Fed achieve these mandates?

Answer 1

a)

Reasons for the changes in Interest Rates by Fed

If the economy is growing too fast

Inflation will heat up and then Fed will raise interest rates to reduce cash with public, spending rate and borrowing. So allow consumers to borrow and spend more, which helps spur the economy.

If the economy is growing too slow

Fed will reduce the Interest rates to boost up the economy and spending as lower interest rates makes the debt cheaper so the businesses will invest, and create jobs.

b)

Reasons for the changes in Interest Rates by Fed

Also allow consumers to borrow and spend more, which helps spur the economy.

Lower interest rates make the debt cheaper so the businesses will invest, and create jobs.

So Lower Interest Rates will boost the Economy

Due to Covid-19 pandemic situation, the whole world went into lockdown including USA. So it lead to Loss of employment, lack of money to purchase and loss of demand for the products.

So to boost the Economy, FED cuts the interest Rates Sharply.

What is the Fed's current interest rate policy and what connection does this strategy have with current economic conditions?

c)

The present Fed's goal is to boost the economy.

Due to corona virus pandemic People lost the livelihood, jobs and on other hand industries lost the demand for the products.

By reducing the interest rates The Fed encouraging pubic to borrow the funds and spend on the capital asset or revenue expenditures, which will in turn increase the Demand for the Industrial Products and Increase the employment.

It will also encourage the Businesses to Borrow and invest thereby increasing the e capacity and increase the job opportunities.

d)

The Federal Reserve has two mandates: Maintaining

1) Stable prices and moderate long-term interest rates

2) Maintaining maximum employment

Control the inflation rates. And Moderate Interest Rates will reduce Cost of Production and makes the products globally competitive. It will also Increase Foreign Direct Investments.

100% employment is not possible. But rather try to reduce level of unemployment to lowest possible.