1*The Federal Reserve reduced interest rates as a response to the economic difficulties created by the...

1*The Federal Reserve reduced interest rates as a response to the economic difficulties created by the coronavirus pandemic. Explain how and why this should impact bond yields and prices. Explain how this could be offset by changes in bond ratings.

Solutions

Expert Solution

During the present scenario the Federal reserve has slashed its interest rate to almost in the range of 0. this is because it wants to stimulate the slowing demand in the economy.Cutting of interest rate is a reflection of quantitative easing adopted by liberal monetary policies of fed.

Amid the corona virus concern , the federal reserve is expecting the growth to slow down and it is taking precautionary measures in form of rate cuts which are part of the quantitative easing which will help in stabilizing the economy because the people will have to pay less and they will also get easy loans at a low rate of interest.

Regimes of low rate is highly important in such situation when there is a need to counter the weak demand in the economy and when economy is on a complete shutdown it needs bailout packages and stimulus packages.

The bond yields of long-term will go significantly down because people will expect the flattening of the yield curve and also and inversion of the curve at some point of time

No,this could not be averted through increase in the ratings of the bond because this is a a long term downgrading of debt securities as the expected rate of return would be lower because of an impending recession.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

1. The Federal Reserve was created in response to a series of bank failures. How is...

1. The Federal Reserve was created in response to a series of bank failures. How is the Fed able to prevent or limit bank failures and bank runs? 2. What is the financial system and what is its purpose in the economy? Please answer it within Macroeconomics class

Q.4 As a response to current crisis, the US federal reserve has cut the interest rates....

Q.4 As a response to current crisis, the US federal reserve has cut the interest rates. Now what will happen to the level of domestic output as foreign interest rates fallen. Assume that the home country has the flexible exchange rate system and perfect capital mobility? Explain your answer with the help of an IS-LM diagram. Comment: Fiscal policy is more effective in increasing output, when prices and wages are variable as compared to when (i) Prices and wages are...

Discuss how the Federal reserve Bank influences economic activity, touch on interest rates

The Federal Reserve lowers interest rates in the economy to increase economic activity. Using the capital...

The Federal Reserve lowers interest rates in the economy to increase economic activity. Using the capital budget decision tools, discuss how decreasing interest rates can cause firms to make more investments.

1. why Federal Reserve was created, 2. The organization of Federal Reserve, 3. The role of...

1. why Federal Reserve was created, 2. The organization of Federal Reserve, 3. The role of the Federal Reserve in Monetary Policy. You paper has to include references.

1. Suppose the Federal Reserve raises its target for the federal funds rate while interest rates...

1. Suppose the Federal Reserve raises its target for the federal funds rate while interest rates in other countries do not change. The result will be a. an outflow of financial capital, a decrease in demand for U.S. dollars, and a depreciation of the U.S. dollar. b. an inflow of financial capital, a decrease in demand for U.S. dollars, and a depreciation of the U.S. dollar. c. an inflow of financial capital, an increase in demand for U.S. dollars, and...

What happens to the money supply, interest rates, and the economy if the Federal Reserve is...

What happens to the money supply, interest rates, and the economy if the Federal Reserve is a net seller of government bonds? What happens to the money supply, interest rates, and the economy if the Federal Reserve is a net buyer of government bonds.

The Federal Reserve is on the path of increasing interest rates whereas the congress is passing...

The Federal Reserve is on the path of increasing interest rates whereas the congress is passing a tax cut bill. Using the IS-LM model for a large open economy, show the impact of these policies on output, interest rate, exchange rate and net exports. Does it matter whether the economy is at the full employment level or not?

Describe the groups that make up the Federal Reserve created under the Federal Reserve Act of...

Describe the groups that make up the Federal Reserve created under the Federal Reserve Act of 1914 (board of governors, district banks, federal open market committee (FOMC)).

1.Description "In many ways, the Federal Reserve does not control the level of interest rates nor...

1.Description "In many ways, the Federal Reserve does not control the level of interest rates nor the money supply. Rather, this is controlled by the actions of individual banks throughout the economy." Explain the rationale behind this statement. What action is required by the banks for Federal Reserve policy to be effective in stimulating the economy? What can the banks do to negate a Fed stimulus? 2.In 2014, short-term interest rates were near zero, and yet the economy was still...

Subjects