Money and Banking ECO-306
3-1 Discussion: Current Federal Reserve Stance on Interest Rates
The Federal Reserve's current policy is to maintain a target range of 0%-0.25%. Millions
of Americans across have experienced severe financial and emotional hardship as a result of the
current coronavirus outbreak. In several nations, including the United States, the coronavirus
outbreak has hurt communities and hampered economic activities. The state of the world
economy has also been profoundly impacted. Data on the economy that are now available
indicate that the U.S. economy entered this difficult time on solid ground. The labor market
remained robust through February, according to information gathered since the Federal Open
Market Committee met in January, and economic activity increased at a modest rate. In recent
months, job growth has generally been strong and the jobless rate has held steady.Despite a
modest increase in household spending, business fixed investment and exports remained subpar.
The energy sector has seen stress more lately. Overall inflation and inflation for goods other than
food and energy are both under 2 percent over a 12-month period. While survey-based estimates
of longer-term inflation expectations have remained rather stable, market-based measures of
inflation compensation have decreased. In direct proportion to the sharp decline in the price of
oil and the demand for it, the unemployment rate has also climbed sharply. "The Committee
expects to maintain this target range until it is confident that the economy has weathered recent
events and is on track to achieve its maximum employment and price stability goals," because of
all the challenges households are clearly facing. This measure will ensure robust wage growth,
economic growth, and deflation reverting to the Board's symmetric 2% target.
In the first half of the year, the slowdown in the expansion of economic activity that had
already become apparent in late 2000 became more pronounced (2001). In reaction to falling
final demand, an oversupply of some forms of capital, and declining earnings, businesses
drastically reduced public spending, making particularly significant decreases in expenditures for
high-technology equipment. Many businesses in the factory sector struggled with uncomfortably
large levels of supplies as real and potential sales declined, and the ensuing decreases in global
production became more severe. Foreign economies also declined at the same period,
significantly decreasing the need for American products. Consumer spending and the housing
market benefited from the Federal Reserve's vigorous efforts to loosen monetary policy
throughout the first half of the year. However, throughout the summer, the activity weakened
more broadly, there were additional job losses, and the unemployment rate increased. The
Federal Reserve continued its efforts to combat the persistent weakness by lowering the federal
funds rate, bringing the cumulative decrease in that rate to 3 percentage points by the end of
August. However, there were few signs that the economic situation was about to improve,
underlying inflation was moderate and moving lower, and inflation expectations were well
contained. An already frail economy suffered more setbacks as a result of the tragic events of
September 11. In the financial markets, where equity prices fell steeply for several weeks and
credit risk spreads significantly widened, increased uncertainty and badly shattered confidence
resulted in a widespread slowdown in economic activity. The Federal Reserve's top priority in
the days immediately following the attacks was to help strengthen the foundation of the financial
markets and to provide enormous amounts of flexibility to prevent further interruptions to the
operation of those institutions The Federal Open Market Committee (FOMC) reduced the target
federal funds rate after a conference call early the following week and again at each meeting
through the end of the year due to the economic effects of the September 11 attacks. The Great
Recession was the longest since World War II and lasted from December 2007 through June
2009. The Great Recession was notably severe in a number of ways beyond its length. The
biggest drop in real gross domestic product (GDP) since the postwar era occurred between its
peak in 2007Q4 and its bottom in 2009Q2 (based on data as of October 2013). From 5% in
December 2007 to 9.5% in June 2009 to a peak of 10% in October 2009, the jobless rate
increased. The financial repercussions of the Great Recession were also disproportionately large:
home prices dropped by an average of 30% from their mid-2006 peak to mid-2009, and the S&P
500 index dropped by 57% from its peak in October 2007 to its low point in March 2009. US
families' and nonprofits' net worth decreased from a peak of almost $69 trillion in 2007 to a low
of $55 trillion in 2009. As the financial crisis and recession worsened, steps were taken globally
to resurrect wealth creation. Like many other countries, the United States implemented
monetary stimulus plans that combined various forms of increased expenditure and tax breaks.
These initiatives included the American Recovery and Reinvestment Act of 2009 and the
Government Stimulus Act of 2008. Over time, the Federal Reserve's response to the crisis
changed and included a number of unconventional approaches. The federal funds rate was
initially reduced by the Fed via "conventional" policy operations, from 5.25 percent in
September 2007 to a range of 0-0.25 percent in December 2008, with the majority of the drop
taking place in January to March 2008 and in September to December 2008. The significant
decline during those times was as a result of the prospects being significantly downgraded and
the increasing potential costs to output and inflation (including the risk of deflation).
References
Federal Reserve Bank of San Francisco. (2002, January 1). Why did the Federal reserve System
lower the federal funds and discount rates below 2 percent in 2001? Federal Reserve
Bank of San Francisco. Retrieved September 10, 2021, from
https://www.frbsf.org/education/publications/doctor-econ/2002/january/federal-funds-dis
count-rate-2001/.
Rich, R. (n.d.). The great recession. Federal Reserve History. Retrieved September 10, 2021,
from https://www.federalreservehistory.org/essays/great-recession-of-200709.
Thomson Reuters. (2020, March 15). Federal reserve statement - LOWERING federal funds
rate to 0 To .25%. Reuters. Retrieved September 10, 2021, from
https://www.reuters.com/article/us-health-coronavirus-central-banks-fed-idUSKBN2121
A0.
