ECO 2013 Economic Principles

Introduction

The report reviews the article named “How the Federal Reserve Fights Recessions” by Somer Anderson, gives the detail about the ways the Federal Reserve takes up to recover from recession. It also focuses on some policies taken in specific to see the effectiveness. The report lastly analyses the methods used by Fed to take the economy away from recession.

The article talks about the recession and its impact on inflation and employment. The recession happens when the businesses are unable to produce at the optimal due to bottlenecks The businesses lay off workers to reduce costs. This deflation is feared among banks and the financial institutions as it can cause debt inflation, which raises the risks among the debtors and banks fear large number of defaulters can harm their business and assets (Anderson, 2020). Hence the Fed takes up methods like open market operations, reduction in reserved rates, provide loans to banks by discount window and expectation managements by forward guidance. By the methods the Fed tries to improve the credit facilities and the financial sector.

Issues at Hand

The author specifically talks of the interest rates, the amount the OMO and reserved ratios that the Fed took up in face of the Corona virus pandemic. Through the open market buying of bonds and other securities the Fed have injected a $700 bn into the banking system in 2020, lowered the interest rates so that banking can lend this fund to the businesses and consumers. Quantitative Easing (QE) is a form to increase the money supply and lower interest rates. It has also reduced and eliminated the reserved ratios that the banks need to hold with Fed in this pandemic, to increase their capacity to lend along with the QE and raise their business confidence (Deloitte Insights., 2020). With deepening recession the Fed can also lower the discount lending rate just like it did in March 2020 at 0.25% to boost the investments with the highest risks. Discount lending offers favourable terms to attract the investors into new investments.

The Response of the Federal Reserve

The Federal Reserve have taken up strong measures to maintain the flow of credit into the system, it has announced the repurchase of agreement facility foreign monetary agencies, increased and enhanced the dollar liquidity swap. It has reduced regulations for credit facilities and borrowing by households and businesses (Tervala, 2019). The Fed have decreased the funds rate to 0.25% to regain consumer confidence and stability of prices, as inflation increased suddenly (The Fed., 2020). It has taken up the OMO to liquidate the system and raise the productivity and help business retain their employment.  The Fed arranged for the Fed Listens program to provide advice and consultancy services to the stakeholders about their economic situation and provide insights and help them out.

Conclusion

It can be concluded that these methods of the monetary policy taken up the Federal Reserve are optimal in time of crisis, as the bottlenecks that result in the recession are of both real and financial types. The Fed should take up the price stability to reduce unemployment and loss of consumer confidence, resulting in lack of effective demand to lift the economy. From the financial side interest rates and discount lending can keep the investment environment intact. Hence these short term yet effective policies do improve the economic condition of the nation.

References

Anderson, S. (2020). How the Federal Reserve Fights Recessions. Investopedia. Retrieved 14 May 2021, from https://www.investopedia.com/financial-edge/0912/how-the-federal-reserve-fights-recession.aspx.

Deloitte Insights. (2020). Federal Reserve monetary policy in the time of COVID-19. Deloitte Insights. Retrieved 14 May 2021, from https://www2.deloitte.com/us/en/insights/economy/issues-by-the-numbers/federal-reserve-monetary-policy.html.

Tervala, J. (2019). US monetary policy and China's exchange rate policy during the great recession. International Journal of Finance & Economics, 24(1), 113-130.

The Fed. (2020). The Fed - Monetary Policy: Monetary Policy Report. Board of Governors of the Federal Reserve System. Retrieved 14 May 2021, from.

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