Question

A) Why are the Fed's actions taken thus far (due to COVID-19) important? Comment on one or two specific policies the Fed has implemented to spur the economy in recent months; thoroughly explain how they are expected to soften an economic downturn/encourage economic activity?

B) Many say that the Fed's traditional tools to influence money supply and set a target Federal Funds rate were largely exhausted even before the start of the COVID-19 induced recession. With interest rates already very low and with not much room to decrease, the Fed had to resort to much less traditional options to spur the economy. What are the risks of such large degree of intervention by the Fed in recent months (along with its commitment to continue with those actions in the coming years)? Hint/ideas to discuss (you may choose one and elaborate): levels of corporate borrowing, inflating stock prices, widening wealth inequality...

Answer 1

Federal reserve's actions taken during this Covid 19 pandemic is very important.Rate of interests are close to zero,which puts an easy path for the customers for borrowing required funds.Also it is assisting the business firms to continue its operations and pay all the the workers salary.Lending of federal reserve is beneficiary for small and medium scale business along with the workers and localities. Different lending options assist variant sectors.Some options help the normal households and different business ensuring free flow of credit.
Federal reserve initiated a wide arrangements of steps to support the economic damage of the Covid 19 specific policies the Fed has implemented to spur the economy in recent months are:
1)Close to Zero interest rates.
Rates of federal funds:
Target set for federal funds are reduced.On march 3,it was 1.5% which gradually was brought down to 0.25%.Short term interest rates in turn have an effect over the long term rates also.
2) Encouraging Bank to lend:
a) Banks enable direct Lending.Lending rates fell from 1.5% to 0.25%.It is much low than the Great Recession time.Term period has been extended to 90 days.
b) Regulatory requirements are modified for a temporary span.The reforms enable the banks to handle the financial crisis.
Risks of large degree of intervention by Fed in recent months include:
1) Reforms relating to sales and income are unturned
2)debt may have defaulters
3)low interest rates may lead to credit losses.
4)banks profitability will be hampered.
Increase of inflation leads to decline of purchasing power i.e. witg 1dollar, comparatively less goods and services can be fetched.
Interest rates has a negetive impact on bond price i.e.if interest rate increases then the bond price decrease.During inflation, investment for fixed long term income are best time,as during this time, interest rates are quite high.But when interest rates are low,short term investment are better option.