Question

Summarize the nonconventional monetary policy tools newly introduced by the Federal Reserve in response to the economic conditions of the COVID-19 pandemic. Discuss some additional steps the Fed could pursue and mention any potential disadvantages associated with each.

Answer 1

Fed have introduced multiple strategies focused on multiple market participants to help revive the economy in the face of Covid 19. Some of these policies are:

1. Near-Zero Interest Rates: The Fed has cut the federal fund rate by 1.5% since March 3, bringing the rate down to almost 0% to 0.25%. Near zero fed rates is supposed to encourage more liquidity in the market. Also for maintaining the confidence in the system, Fed has offered forward guidance on the future path of its key interest rate, saying that rates will remain low.

2. Encouraging Banks to Lend: The repo and reverse repo rates are decreased to provide liquidity to banks and thus encourage they to lend more and thus provide more liquidity to economy. Fed is also relaxing their regulatory requirements like regulatory capital and liquidity buffers with a aim of empowering then better and encore the to increase lending during the economic downturn

3. Supporting financial markets: (QE):The Fed is now purchasing securities in market to keep the liquidity high, an important tool used during the Great Recession for uplifting the markets. Fed is also providing low cost funding to primary dealers to ensure to keep the credit markets functioning as market participants may be inclined to avoid any risks investment and decrease liquidity in markets due to the volatility and stress jn the financial markets.

4. Supporting corporations and businesses: Increased availability, Commercial Paper Funding Facility (CPFF), New Loans Facility, Expanded Loans Facility, and the Priority Loans Facility are some initiatives to support businesses of all sizes.

Other initiatives have also been taken with an aim of supporting Households and Consumers, Supporting State and Municipal Borrowing and also Cushioning U.S. Money Markets from International Pressures