Question

As part of its response to the COVID-19 impact on the US economy, the Federal Reserve sharply decreased the federal funds rate in March of 2020 from 1.75% to 0.25%. a. What stage of the business cycle - recession or expansion - was expected to follow fron the COVID-19 crisis in early-2020? What changes to employment and inflation would have been worrisome to the Federal Reserve?

Answer 1

The Federal Reserve expected a recession following the COVID-19 crisis in 2020 and lowered the federal funds rate to stimulate the economy. They were concerned with unemployment and deflation, which could worsen the downturn.

Step-by-step explanation:

During the early stages of the COVID-19 crisis in 2020, the Federal Reserve expected a recession to follow. In anticipation of this economic downturn, the Fed enacted a loose monetary policy, which included a significant reduction of the federal funds rate from 1.75% to 0.25%. The Federal Reserve was particularly concerned about rising unemployment rates and the potential for deflation, similar to the Japan-style deflation fears of the early 2000s. To combat these issues and stimulate the economy, slashing rates was a strategy to encourage lending and investment by making borrowing costs cheaper for businesses and consumers.

Inflation was another key concern for the Federal Reserve, although deflation was more pressing during the crisis. In prior instances such as during the 2008 Great Recession, the Fed had reduced the federal funds rate to nearly 0%. This extreme measure highlighted the Fed's willingness to use all available tools to combat economic downturns and support financial markets. Eventually, as the economic situation improves and inflation stabilizes, the Federal Reserve typically begins to raise the federal funds rate again, as seen in the early 2000s after the dot-com bust.