This chapter talks about appropriate monetary and fiscal policies to affect the economy. Spring and summer of 2020 we watched both in action. What were the FRB’s actions in their attempts to lessen the affect of Covid-19 on the economy? Were they successful? How about the federal government? Were they useful? Do you agree with the actions taken by the FRB and the Federal government? Why or why not? What are the risks associated with their policies?
(There are a lot of questions here and this really is the meat of the course. I will give up to 10 points for exceptional responses.)
Federal Reserve Board in the Spring and Summer 2020 took many actions to help lessen the blow of the Covid19 recession. Household spending pulled back as people stayed home, businesses closed, and overall output dropped. FRB is committed to promote maximum employment, provide stable prices, and ensure stability of the financial system. They started out by lowering the interest rate to near zero, and they committed to keeping this rate low until the virus and economy are back on track. Preserving the flow of credit is essential to mitigate the damage to the economy. They purchased large amounts of treasury and mortgage backed securities. These markets play a critical role in the economy. They created programs where they are the back stop in loans, supporting lending. The Cares Act was implemented to help businesses stay open during this time of low demand. The decline of GDP in Q2 might go down as the worst drop ever recorded. The rise in unemployment was felt differently by many different types of people. Due to the lack of demand, inflation fell and prices fell.
The FRB move to keep rates low and to purchase treasury holdings somewhat worked. The low rates kept credit flowing to both home owners and to businesses, as well as serving as a backstop so private lenders could continue to lend. What they did, helped. But we are stuck until the virus shows signs of going away. People have to feel safe to resume somewhat normal activity in order for the economy to come back fully.
The unemployment rate dropped throughout the summer. Inflation has really dropped due to the weaker demand. Especially when it comes to hospitality and travel. When it comes to food inflation has come up a little bit.
Our ability to control the virus is going to drive this recovery. I believe during the summer of 2020 we learned how to help slow the spread, while resuming some form of normal activity. We also learned how to treat those with Covid19. We have determined the most vulnerable among us and how to keep them safe. There are also some vaccines on the horizon that are promising. The optimism is very real, even as we see the USA numbers bypass 13 million covid19 cases.
I agree with the fed stepping in during times when needed to assist. I think recessions would be much deeper and longer, and more painful if they aren’t available to make these kinds of adjustments. The fed has “lending not spending” powers. Keeping the credit markets flowing, keeping the rates low, allows for so much investment in our communities. Businesses that can get loans to cover payroll and short term hardships, homeowners and car owners that can refinance debt and lower their monthly costs, and students that can refinance student loans, these are all good things to inject some power into our economy.
Economic stability is the most important thing. When there is unease about our economy, businesses and consumers will be more conservative with their risk taking and investments. This attitude will slow an economy down, slow down overall investment, and gdp will suffer. When people feel that the economy is stable, gdp will perform better.
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