Question

After the Financial Crisis of 2007-2009, the Federal Reserve dropped the Federal Funds rate to 0.25% until late 2015. Between December 2015 and December 2018, the Fed steadily increased that rate to 2.5%.

Provide your opinion on how banks should react to the Federal reserve expectations for interest rates in 2019.

Answer 1

This question seems pretty old, as it is already 2020.

By the end of 2019, most Federal Reserve officials believed that the three rate cuts they have made that year would be enough unless the economy weakened significantly. The consensus among economists was that the Fed would then pause after having cut rates three times in 2019, with its benchmark rate now in a range of 1.5 percent to 1.75 percent. The central bank’s key rate influences many consumer and business loans.

Officials also released quarterly forecasts, which showed:

• The median estimate for the fed funds rate was at 1.6% at the end of 2020, 1.9% in 2021 and 2.1% in 2022. Officials expected rates to stay on hold next year, while four see a hike as appropriate.
• The jobless rate was expected to be 3.5% by late 2020. The long-run unemployment rate was seen at 4.1%, down from 4.2% in the September forecast.

In the year 2020, the US Federal Reserve stepped in to prop up the US economy in the face of the escalating Covid-19 crisis. In its most dramatic move since the 2008 financial crisis the Fed announced it is cutting its benchmark interest rate to near zero and said it would buy $700bn in Treasury and mortgage-backed securities as it attempts to head off a severe slowdown.

In a coordinated effort to head off a potential global economic crisis, the central bank also said it was working with the Bank of England, the European Central Bank and others to smooth out disruptions in overseas markets.