Question

The interest rate on reserve balances (IORB) is the Fed's newest monetary policy tool. For each of the following situations, indicate whether the Fed raised or lowered the IORB.

1. In 2020, at the onset of the COVID-19 recession
2. In 2009, when onset of the the COVID-19 unemployment recession. rate was increasing due to the Great Recession.
3. In 2022 , as the economy recovered from the COVID-19 recession, and the unemployment rate fell below 4%.
4. Between 2016 to 2019, when the unemployment rate was below 6%.

Answer 1

1. In 2020, amid the COVID-19 recession, the Fed lowered the Interest on Reserve Balances (IORB) to stimulate the economy. 2. In 2009, during the Great Recession, they lowered it for economic stimulus. 3. In 2022, with the recovery, they raised IORB to manage inflation. 4. Between 2016 to 2019, as unemployment decreased, IORB was raised to control inflation.

1. In 2020, at the onset of the COVID-19 recession:

- Fed Action: Lowered the IORB.

- Reasoning: To stimulate economic activity and provide liquidity during the recession.

2. In 2009, when the unemployment rate was increasing due to the Great Recession:

- Fed Action: Lowered the IORB.

- Reasoning: To encourage borrowing, spending, and investment to counteract economic downturn.

3. In 2022, as the economy recovered from the COVID-19 recession, and the unemployment rate fell below 4%:

- Fed Action: Raised the IORB.

- Reasoning: To prevent the economy from overheating and manage inflationary pressures during recovery.

4. Between 2016 to 2019, when the unemployment rate was below 6%:

- Fed Action: Raised the IORB.

- Reasoning: To manage inflationary pressures and normalize monetary policy as the economy approached full employment.