In an unprecedented move today, the US federal reserve, which controls and coordinates American monetary policy, has announced a cocktail of measures to combat the economic fallout from the coronavirus which utilises almost every weapon in its arsenal.
In a bid to save small businesses, free up capital for cash-strapped banks, and encourage consumers to buy, buy, buy, the Fed has announced a drop in the interest rate to effectively zero, a massive quantitative easing program of around $700 billion, and a cut in the reserve requirement ratio for thousands of banks to zero.
It is hoped that through the timely implementation of these measures, we will avoid the same style credit crunch which crippled the US economy in 2008, eventually leading to what many believe was the worst financial crisis in modern history, and since the great depression.
The combination of all of these tools being used simultaneously only goes to highlight the scale of the economic crisis the US, and the rest of the world, is now facing. With interest rates dropping all over the world, it would seem that monetary policy is very much the favoured tool in attempting to save our global economic system. Let’s hope they are right!
THINK LIKE AN ECONOMIST!
Q1. What is meant by the term quantitative easing?
Q2. Explain the different types of monetary policy which are mentioned in the article.
Q3. Evaluate the impact that these measures are likely to have on the US economy.
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