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Running Head: FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S.

ECONOMY CURRENTLY 1

Federal Reserve Rates and Effects on the U.S. Economy Currently

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FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 2

In the U.S., the Federal Reserve interest rates upset the ability of consumers and firms to

get credit. Federal Reserve is the Central bank of the U.S., and it helps run the country by

offering safe, flexible, and steady financial as well as the monetary system. Federal Reserve

came about to elevate financial catastrophes that were experienced by the country. It has the

Federal Reserve Act that has fiscal policies. The Federal Reserve heads approve the plans, and

there is no interference by the President, the executive, and other legislative branches of the

government. Neither does it receive its funds from Congress. Federal Reserve is the fiscal agent

of the government (Carvalho et al., 2017). It also is the curator of the commercial banks' reserve

accounts and gives loans to commercial banks. It supervises the supply of all forms of

currencies; this is in the coordination of the U.S. Mint. The bank has a 7-member board of

governors, who governs the reserve requirements, evaluates and determines the discount rates,

and analyses the budgets of the reserve banks.

Federal Reserve helps in money supply and often influences the discount rate by

manipulating them. The discount rate is the interest rate that the Federal Reserve Banks charge

on the loans of the member banks. The commercial banks seek loans so that they can maintain

their reserve levels as required by the regulation. The Federal and Reserve engage in supervisory

and regulatory mechanisms on the state-chartered banks, foreign banks operating in the U.S., and

bank holding firms.

Consumers tend to spend more, creating a significant effect on the economy due to

increased spending when they are paying less interest. The creation of Output and productivity is

because businesses and farmers also happen to benefit from lower interest rates as they are

encouraged to purchase huge tools as the borrowing fee is small.


FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 3

On the other hand, high-interest rates make customers, businesses, and farmers lack much

disposable income and spending gets reduced, and hence productivity is slowed. Banks tend to

make fewer loans because of high-interest rates and high standards of lending, leading to

businesses being affected (Bonis et al., 2017). Rise in interest rates will make the bills to increase

in value, therefore leading to exports being not as much competitive also imports turn out to be

of low-cost. The price increase also tends to be lower, economic growth becomes slower, leads

to a rise in unemployment, and there will be a rise in borrowing costs in the government.

With the current epidemic of Coronavirus affecting the U.S., the interest rates have

reduced to a low of 0.25%. The move is to have the expansion of the economy. When the

economy is booming, the Federal Reserve raises the interest rate. When the interest rates drop,

borrowing costs reduce, and this makes the companies take loans to run their business by hiring

more workers and increasing their productivity.

There are the federal funds' rates, which are the interest rates that depository institutions

trade the Federal Reserve Banks' balances with one another overnight. Banks frequently change

the proportions of interests in reaction to the economic activity in the raise and lowering of rates

when the economy is secure, and when it is sluggish, respectively (Fischer 2016). The change in

interest rate dictates how the banks borrow money and have a direct impact on the outcome of

the economy. Lowering of the interest rates may make the borrowing of funds much cheaper

hence it encourages and the spending and investments in businesses and the boost of asset prices.

Nevertheless, these lowering of rates could lead to some difficulties, such for instance, traps in

liquidity that can damage the efficiency of the low frequencies.


FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 4

When we have the interest rate change, there are real-global effects on the ways that

consumers and firms access to credit so that they can make significant purchases and manage

their finances. Interest rates impact various life insurance policies. When the Federal Reserve

imposes interest rates, the consumers often pay more for the capital, which is vital to carry out

purchases. Notably, companies face higher costs tangled to expanding their processes and

funding payrolls.

Federal Reserve often lowers the interest rates so that they can stimulate economic

growth. Lowering the interest rates translates to having reduced financial costs, and this helps

encourage investments as well as borrowing. In cases where the rates are too low, there can be

excessive growth, and this can bring about inflation (Bonis et al., 2017). Generally, this would

mean reduced purchasing power, and these damages the sustainability of the economic

expansion. Increasing the interest rates helps slow down the inflation, and this helps restore the

economy to desirable and justifiable levels.

Reducing the interest rates makes borrowing more attractive, and people can now make

big purchases more of commodities like vehicles and houses. Having reduced interest rates

ensures that they remain with a surplus that they can plow back to spending, and thus, increases

the basket of consumption. The probability that the borrower won't be able to pay the money

based on the loan borrowed, the borrower has to compensate for the risk involved without being

able to pay the mortgage on time in that the borrower has to pay interest as a reward for the

lenders as compensation money. The borrowers use the money immediately instead of making

savings from that amount of cash.


FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 5

The higher rate of interest means that the consumer does not have a lot of throw away

earnings. Thus, one must reduce the spending rate. Banks create fewer loans when the interest

rate is high, combined with high lending standards. Not only does this affect the consumer but

also the farmers and the businesses. Generally, this is because they cut on the spending of the

firsthand equipment. Typically, this helps in lowering productivity and the number of workers in

the country. The banks' rate of lending each other money could change daily because of the

movements' price on the loan rate effects that is used as a pointer to show if the rate of interest is

increasing or reducing.

Changing interest rates can have desirable or undesirable effects on the U.S. market.

Interest rates in almost every case have an impact on the whole economy, from the bond markets,

recessions, and inflation. Interest rates affect the spending processes of individuals. When there

is a loan given, there is always a probability that the borrower will not honor the loan. There is a

need to compensate for the lenders. Therefore, there has to be a particular form of reward.

Notably, the interest rates are the rewards that the lender enjoys after giving out a loan, and it

gets appreciated after the borrower contributes to paying the loan.

When there are interest rates, the individuals borrowing often find themselves spending

the finances immediately, rather than waiting to save the funds from carrying out buying. When

the interest rates are high, the consumers remain with less disposable income, and hence they

must cut the spending. In cases where the high-interest rates are together with increased lending

criteria, banks find themselves making fewer loans. Generally, this affects all the sectors of the

economy, where individuals cut on their spending (Basnet & Donou-Adonsou, 2016). It reduces

productivity and also causes unfavorable effects on the economy. The tighter lending criteria and
FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 6

procedures could mean that there is limited borrowing, and this goes a long way in affecting

companies' bottom lines.

Interest rates have had effects when the U.S. has faced inflation and moments of

recessions. With the Federal funds rate having to change in a matter of a day, there loan rates

affected by these movements. Notably, this movement is applied as an indicator to illustrate if

the interest rates are increasing or they are just dropping. Primarily, this can upset inflation and

also the depressions. When inflation is left unresolved, there can be increased inflation, which

reduces purchasing power.

The Federal Reserve lookout at the inflation indicators like the producer price index (PPI)

and the consumer price index (CPI).When the hands rice by two to three percent annually, the

Federal Reserve increases the federal funds rate. Notably, this helps cushion rising prices. It is

because, with higher interest rates, there are increases in borrowing costs, and this ensures that

individuals spend less. Significantly, this causes the demand for products and services to go

down, and this causes inflation to fall. There was in the years 1981 and 1982, where the inflation

rate was 14% annually. Typically, this prompted the Federal Reserve to increase the interest rates

to 19%. By doing this, there was an unfavorable recession created. Substantially, the recession

helped put a halt to the escalating inflation, which was experienced by the nation. Equally,

reducing interest rates can also help end a particular slowdown. When the Federal Reserve

decides to lower the federal funds rate, borrowing finances becomes inexpensive, and this

attracts individuals to commence making expenditures over again.

In the years 2001 and 2002, the Federal Reserve lowered the federal funds rate to

1.26%.generally, this significantly helped restore the economy, and there was a recovery that got
FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 7

realized in the year 2003. Therefore, lowering and even increasing the federal funds rate can help

mitigate roaring inflation and also reduce the relentlessness of depressions.

The interest rates also upset the U.S. bond and stock markets. There is an extensive range

of investment opportunities held by investors. We can have a situation where there is a blue-chip

stock, and one compares the dividend yield to the interest rate on a certificate of deposit (CD) or

the return on a U.S. Treasury bond (T-bonds) (Swanson, 2018). Also, the shareholders pick the

choice that offers the highest rate of yield. Currently, the federal fund rates incline to define how

investors invest their finances, as these rates impact the revenues on both C.D.s and T-bonds.

Increasing or lowering the interest rate affects consumers' or companies' psychology.

When we have a situation where interest rates are rising, the individuals often lower their

spending. Generally, this causes the earning that need to get generated reduce. When there is an

increase in the interest rate, on the other hand, it would mean that individuals would spend more,

and this makes the stock prices to go up.

Interest rates also have an impact on bond prices. There is an inverse relationship

between interest rates and bond prices. Notably, this means that when we have the interest rates

increase, then the bond prices reduce significantly and vice versa. When there is a more extended

period of maturity of the bond, then the more it will change per the interest rates (Carvalho et al.,

2017). The fixed-income investors are negatively impacted by increased interest rates that make

the price of the bonds to go low. When the interest rate increases, individuals are, in most cases,

likely to carry out less borrowing or even lowly repay the existing debts because it can be

expensive.
FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 8

One of the ways that the Federal government or the firms raise finances is by selling

bonds. So, when the interest rates go up, the charge of borrowing becomes more costly.

Essentially, this insinuates that demand for bonds that yield less income will fall. Notably, this

causes the price of the bonds to fall. When we have a case where the interest rates drop, it gets

easier for an individual to borrow finances, and various businesses issue new bonds that help in

financing expansion (Fischer 2016). Primarily, this brings about the demand for bonds that yield

higher earnings to increase, thus making the bond prices to go up.

An increase in the Federal Reserve rate has powered a jump in the prime rate. The

premium rate characterizes the credit rate that banks have given to their creditworthy customers.

The rate encompasses other arrangements of consumer credit that get seen. A higher prime rate

would mean that banks will raise the fixed and variable-rate borrowing charges in the event of

where there is assessing the risk on less creditworthy businesses and customers.

After working on the prime rate, the individual's creditworthiness is determined on given

their risk profile. Credit cards and loans require a widespread risk-profiling mechanism so that

the customers can make purchases. Longer-term borrowings have fewer rates compared to short-

term lending.

When there is a tick up of the prime rate, the certificate of deposit and money market

rates usually have an upward trajectory. The named savings are enhanced among the customers

and the companies, too, because they can produce a higher return on their savings (Carvalho et

al., 2017). On the contrary, the effect may be that an individual having a debt burden would opt

to make payment of their financial responsibilities to offset the higher variable rates that depend

on credit cards, loans, and other forms of debt instruments.


FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 9

When the interest rates increase, the borrowing costs of the U.S. government get boosted.

Essentially, this fuels a rise in the national debt. A survey shows that the U.S. government will

be paying more because of the increased interest rates compared to when they are near the zero

marks. When interest rates rise, it is welcoming news for banks because they can earn more

revenue from the loans that they lend. When it comes to the other financial sectors, an increase in

the rates brings about profitability (Swanson, 2018). Essentially, this is because the cost of

capital requires to expand has an upward trajectory. Besides, this could spell doom for a market

that is in an earning downturn. Reducing the interest rates should help boost firms' profits as they

can generate capital with low-priced financing and make investments in their operations for an

inexpensive cost.

In the U.S., auto businesses have profited enormously from the Federal Reserve's zero-

interest-rate policy, but increasing benchmark rates will have an increased effect. It is important

to note that auto loans have not fluctuated much since the Federal Reserve's declaration because

they constitute long-term loans. Reduced interest rates on auto loans boost buying of vehicles,

but these enormous ticket commodities may not be as sensitive as more instantaneous

necessitates borrowing on credit cards.

An increase in the interest rate often makes individuals rush and close on a deal to secure

a long-term fixed loan rate on a new house. Over time, mortgage rates have been viewed to

fluctuate more concerning the yield of domestic 10-year Treasury notes, which are, in most

cases, affected by the interest rates. Thus, when we have interest rates reduce, mortgage rates

also are affected, and they fluctuate downwards. Reduced mortgage rate mostly means that it

becomes inexpensive to buy a house.


FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 10

Higher inflation and higher interest rates mainly help in bringing stability in demand for

houses. When we have a 30-year loan at a 4.75%, the individuals purchasing the home can

anticipate a 60% in interest payments over the duration given. But when we have a case of

interest rates lowering, the same house for the same purchase price will result in reduced costs,

and there will be lower interest rates paid over the mortgage lifetime (Fischer 2016). As the

mortgage reduces, the houses get more affordable to many persons, and this attracts more

customers willing to make purchases.

An increase in borrowing costs conventionally weighs on the customer's spending.

Higher savings rates and higher credit card rates because of better bank rates offer fuel a decline

in consumer desire to make purchases. In a case where the interest rates decrease, the customers

can purchase commodities on credit at reduced costs (Basnet & Donou-Adonsou, 2016).

Notably, this can have to do with credit card purchases to piece of equipment bought on store

credit to vehicles with loan terms.

When we have a case where the U.S. dollar loses value when the economy heats up, there

is inflation realized. Essentially, this makes the prices of products and services to go up in the

economy. Generally, it is a situation where the economy is growing very rapidly that the demand

for products and services outperforms the supply, hence pushing the prices up. In a case where

the inflation goes up, interest rates are also affected the same way, and they go up as well.

Primarily, this helps the central banks to keep inflation under surveillance. When the interest

rates decrease, inflation can start to increase as individuals purchasing on cheap credit can

commence bidding up prices again.


FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 11

When the economy weakens, the Federal Reserve comes up with mechanisms to lower

the interest rates. Essentially, this helps fight the growing inflation or crisis by the use of tools to

reduce the borrowing costs, so that companies and individuals can spend more or even make

substantial investments, with the primary goal of ensuring that the economy continues to grow

along smoothly.

With the current pandemic facing the world, financial institutions have got seriously hit,

and they are grappling with a series of issues that need to get addressed. COVID-19 outbreak has

also caused economic hardships to businesses, consumers, and communities as a whole. Areas

whit include trade, finance, liquidity, tax, operations, supply chain, and the entire workforce in

general. Both banks and companies should adopt continuity plans and strategies to address the

fast-moving devastation to the economy brought about by COVID-19 that is taking the economy

to a recession (Curdia, 2020). Borrowers have a hard time carrying out borrowing even when the

interest rates are at an all-time low. Notably, this is because there are low supplies because of the

lockdowns that have got put in place.

COVID-19 has rendered many people jobless because they cannot attend to their

activities because of the lockdowns and the idea of social distancing. Notably, these individuals

cannot assess loans and mortgages to support their livelihood in this time of the epidemic. The

persistence of the disease is stressing the resources and loans, mortgages and reliefs are vital for

the sustainment of the economy in this time of pandemic crisis. COVID-19 has led to the U.S.

economy slowing and the consumer lending market dwindling (Bahaj & Reis, 2020). Young

people are the hardest hit, with a majority of them being unemployed and underemployed

because they are the driving force of the economy as compared to the senior citizens. The only
FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 12

way to revamp the situation is by providing income support to them so that they can sustain their

livelihood and pay for the loans and mortgages that they could be having.

The unavailability of ready supply and demand is killing borrowing because no activities

are going on because of the proposed quarantines, travel restrictions, and closing of schools and

other forms of businesses. The banks are working hard to see their daily activities are working

despite the advice on social distancing and compliance functions directed to them by the Federal

Reserve. The bans are working hard to meet the consumer expectations as well as managing the

revenue they have even in this period when the interest rates are near the zero marks. The

epidemic has changed consumer behaviors, and they are not engaging in economic activities, and

this is bringing a decline in the economy. The Federal Reserve has brought down the interest

rates down to zero so that it can encourage the borrowing of short term loans and ensure that

there is liquidity in the market and consumer needs get met so that it can avert an economic

crisis.

There are numerous calls by many customers who are worried about conducting banking

activities without having to interact physically in public areas. In the U.S, the banks are working

hard to ensure that desirable profit margins are maintained. They are also confirming that

businesses and individuals go on with their activities with minimal hindrance. Digital platforms

are the key instruments that can get used to ensure that everything runs as they used to be before.

Phones are increasingly getting used to help customers to do bank processes. They have

increased in dispatching the required information and reassurance during these uncertain times.

The digital platforms are useful because they are ensuring that social distancing gets

achieved while at the same time doing transactions and operating accounts like the borrowing of
FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 13

loans without being physically there. Traditional banks will have to adopt digital financial

platforms so that they can compete favorably with the new banking financial institutions (Martin,

2020). Recently, the Federal Financial Institutions Examination Council directed all banks in the

U.S. to virtually test their online systems so that they can ascertain their capability to handle a

flood of customers demanding digital banking demands. The institution called on customers to

rely on telephone banking, online banking, and the use of caller center services heavily.

Many traders have opted to work from homes, and the use of these digital platforms is

heavily necessitating their activities without them having to be mobile. Many workers have

contracted the virus and have got sidelined in the workplace. Many of the companies are

instructing that their workers work from home. The Federal Reserve is calling for digitizing

different financial processes to reduce the likelihood of in-person exchanges. Training processes

are underway to train individuals to use digital tools. Given the numerous breakdowns by the

digital platforms that have made individuals use the physical locations, the Federal Reserve is an

encouraging digital developer to come up with high-level technology to assist with the banking

processes. Many of the people living in the U.S. have filed for the benefits of unemployment.

Notably, this has affected employers to dismiss workers in every sector of the economy. The

economy rate has dropped due to the coronavirus pandemic.

Most of the businesses have been interrupted as a result of this pandemic. There have also

been significant incurrences of losses in the industries. Confinement measures have got

introduced to help in protecting the people against this Coronavirus. To battle the outcome in the

economy, the U.S. Federal Reserve cut the introductory interest rates to almost zero (Beckworth,

2020). The economic growth rate is expected to drop to a rate of 2.6%, and the unemployment

level rises. The policymakers around these countries engage in the implementation of monetary
FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 14

measures to ease the problems financially on the people and the economies that are severe

pressure.

The unemployment rate has grown close to the 11% mark, in that it has become

uncontrollable and has intentionally shut down the economy. The unemployment levels are to

rise soon due to this epidemic, in that it will bring about the people within the various sectors of

the economy further lose their jobs as well their livelihoods are affected. This pandemic has

brought about a decline in sales within the economy.

Generally, due to the Coronavirus affecting countries, governments are forced to change

policies during this pandemic to enable many people to afford to lend. In the United States, the

Federal fund rates got lowered and lowered the cost of discount window lending. To support the

movement of credit facilities were introduced by The Federal Reserve. The use of capital as well

as liquidity buffers to lend depository institutions was encouraged by Federal banking

supervisors. The banking sector needs to work constructively with borrowers affected by the

Coronavirus. Corona virus-related loans got pointed out that they would not get classified as

troubled debt restructurings.

To limit the level of economic damage from the Coronavirus that it has done in the

country, the Federal Reserve has come up with many policies. The Federal Reserve has also

stepped in with a variety of actions. To lend support households, employers, financial markets as

well as state and local government, The Federal Reserve has put up to $2.3 trillion for lending.

The Federal Reserve's in the United States acts as a tool of the last resort in that the banks tend to

borrow from the Federals. The discount window is hardly used in that it makes the banks look
FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 15

weak. There has also been a lowering of the charged rates by the policymakers on the finance.

Together with the loans extended within three months.

The federal reserves have got involved in trying to protect the United States economy

from suffering from the coronavirus pandemic. The Federal Reserve has been developing out

new efforts and reducing the rates of interest to nearly zero, and the introduction of the asset

purchases (Atkeson, 2020). Rates have been cut twice in April on an emergency basis By the

Federal Reserve. On March 3rd was when the first cut of half percentage point got done as well

as March 15th, the second cut of a full percentage point got done. Generally, this enabled the

rapid borrowing rate of the Federal Reserve for banks to go back to nearly zero. The decline gets

intended to prevent the cost of loans for banks from rising; hence the price is kept down.

Generally, by extension, the Federal Reserve ensures that the borrowers get ample time to access

credit during the coronavirus pandemic.

The Coronavirus tends to continue to live on banknotes for some days. Generally, this

has led to an acceleration of the spread of disease. To avoid handling banknotes as much as

possible contactless payment has got preference as the World Health Organization has advised

people. Generally, some banks such as U.S. Federal Reserve have instituted the practice of

isolation of banknotes from Asia for some time. Likewise, quarantined bills that originated from

local banks are getting kept isolated for up to two weeks. The government is requesting lenders

to disinfect physical notes and keep them in quarantine. It is becoming hard to pay the creditors

without having to sell assets, and many companies are finding it hard to a point where they are

liquidating their share to evade defaulting.


FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 16

Individuals are getting advised to stay at least six feet away from visibly sick people as

part of the official recommendations by the centers for disease control and prevention. Notably,

this is emerging as an impossibility at physical branches where close interactions and long lines

get expected. In the United States, physical banking is looking less attractive, since the disease

has the capability of spreading even before people exhibit the symptoms of illness, making the

avoidance of the virus nearly impossible (Drozd, & Tavares, 2020). Those likely to avoid the

physical branches in the United States first are those that are highly likely to contract the virus

faster. They are the Elderly consumers, and they tend to have pre-existing conditions; hence their

lives are posed with a direct threat from the Coronavirus. In the United States, more cases

continue to appear, and banks inevitably have to adopt contactless transactions, including the

United States Federal Reserve.

There is the need to have an economic stimulus given by the federal government in this

time of crisis. Generally, this is to help small businesses and those that have been made jobless

by the epidemic. The unemployed will get given funds based on what one earned before being

rendered unemployed. Single adults will earn less compared to married couples with children.

For children that qualify and are under the age of 16 will also get these funds. The idea is to

salvage the economy in these times when the people are facing tough times that they have

limited impact of cushioning it. The government is giving the economic stimulus to help

individuals not to default on their loans and mortgages. The economic shutdown is the

determining factor of whether people will default on their loans and mortgages. Every day new

individuals are registering that they have been rendered unemployed, and the number is swelling

to levels that will be hard to sustain, given that the epidemic is not ending.
FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 17

Numerous households around the country are grappling with the idea of not honoring the

loans. Mortgages are the first to be dishonored, followed by loans. It gets estimated that more

than a trillion dollars of mortgages and loans will get defaulted by the end of the year 2020.

Notably, this will be brought about by the high rate of unemployment that is rising steadily.

Currently, more than 2 million households are defaulting on their mortgages because of the

epidemic. Presently the amount of people who have filed for being unemployed has hit 26

million, and this will only stress the resources given by the Federal government. There is

increased call by those holding mortgage for relief and are also asking for forbearance, and the

number is still rising. Banks and other online lenders are feeling the heat brought about by

default. By the end of April, 12% of those that applied for loans and mortgages, had either had

them defaulted or were past due time given to have their loans honored. Large online lenders had

an outstanding loan of more than 10 million dollars in the U.S, which remain serviced because of

the pandemic.

The interest rates are low to encourage people to borrow and pay at a later time when the

economy eases. There can be calls to have a negative interest rate that surpasses the zero mark.

Still, there can be rigorous changes in taxation, regulatory and legal matters, and the government

has to come in to help achieve this. Federal Reserve is using the lenders as the last result where it

is encouraging the use of discounts at these situations of a pandemic. It is pursing for keeping

the credit rates at low levels so that there can be economic activities that help in the running of

the economy successfully. The banks are required to have a total adoption of the counter buffers.

That gets used in times of crisis. The protectors help banks the lending to occur in a way that is

not strenuous to them.


FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 18

The Federal Open Market Committee is planning on the interest rate range to back it so

that there can be more lending, and banks have no fear of the risk involved in lending in these

pandemic times. The committee also wants to foster price stability and maximum employment to

counter the harsh economic times. The economic outlook is evolving by the day, and the Federal

Reserve is formulating measures to collect the rough economic times. It is cutting the rates to be

at zero percent to 0.25%, and it is purchasing mortgage-backed securities and giving Treasuries.

The government is giving money to fight the pandemic and creating vaccines to ease the harsh

economic times faced.

As the banks are heavily reliant on networking and interlocking compared to the

companies which require having physical supply chains, the use of technology gets highly sought

to ensure their services get effectively given. The banking system is coming up with ways it can

use to ensure that the human behavior of socializing gets minimized while at the same time

ensuring that the services get achieved. There are liquidity and capital buffers to lend that the

banks have that help in the harsh economic times. They help to cushion the interest rates and

make them not to go up because they have a surplus in store for them to lend out. There are

facilities in place that have been formulated by the Treasury. They get aimed to give credit so

that to ease the economic crisis.

Government expenditures and pumping of finances in the economy help to ease the

economic recession. Facilities like the Primary Dealer Credit Facility, Commercial Paper

funding Facility and Money Market Mutual Fund Liquidity Facility help provide loans to

depository institutions that assist in the issuance of loan and security funds to the struggling

small businesses and those rendered unemployed. The Federal Reserve is repossessing repo

operations so that it can help to channel the cash on hold to the money market so that it can
FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 19

circulate (Curdia, 2020). They, in turn, give securities that are backed by the government and the

Treasury. The Federal Reserve is also buying corporate bonds from companies that are

actualizing their inception. Generally, this is the expenditure process that gets aimed at injecting

money into the economy to ease the economic recession. Notably, this is to help relax the 4.8 %

decline in GDP that has got witnessed. Federal Reserve is putting measures that will help ensure

that there is no inflation seen in the economy.

The weaker demand in the economy because consumers are not making purchases

because of the job losses they face and the low oil prices that are ensuring there is consumer

price inflation. By Federal Reserve help in addressing this, it will help to quell the economy. It

will involve rigorous changes in the financial sector that affect lending of resources and using the

multiplier factor to ensure more money circulates in the economy and effectively meet the needs

of all the people in the country. The Federal Reserve is actively using its tools so that growth can

be realized even in this epidemic period (Drozd, & Tavares, 2020). When the interest rates are at

zero, there are no hopes of the economy performing well because they will have to use the

reserves and buffers that get stored for a likelihood of an economic crisis.

Federal Reserve economic stimulus is a way of helping increase expenditure that is aimed

at easing the financial crisis (Swanson, 2018). Cutting of the interest rates is to help the people of

the U.S. to borrow at an attractive rate that will be beneficial to them. Notably, this will help the

Federal Reserve to ensure that there is an expenditure in the country that allows averting

economic recessions. The expenditure motive is to help maintain employment and price stability.

The high spending employed by the Federal Reserve and the very low-interest rates used are

vital for sustaining a bullish economy even in this time of economic crisis.
FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 20

In the wake of COVID-19, banks should offer payment extensions as well as other

programs that are allowable by their balance sheets. They should effectively look at the

customer's liquidity shifts. Companies should protect their employees and service providers.

Avoiding contagion to banks and the transmission risks in the overall economy is suitable for

ensuring that the economy comes back to its feet. The federal government should work hard to

come up with a vaccine that counters COVID-19 so that the economy cannot get curtailed. The

U.S. economy is gradually entering a contraction, and so before a vaccine gets developed, the

Federal Reserve should embrace significant measures to reduce a contraction of the economy

(Acharya & Steffen, 2020). Contraction is arising because of the complicated supply chains as

well as the reduced demand in the world economy. Notably, this is lowering the wealth of

households in the economy. Generally, this is as a result of unemployment, where companies are

finding it hard to retain workers.

The policies adopted by the Federal Reserve will dictate how the economy bounces back

from the pandemic. The Federal Reserve is in the frontline to curb the economic slowdown.

They are ensuring that there is no lack of liquidity in the economy. The biggest problem is that

with the halt of many activities because of restrictions put in place that has rendered persons and

companies insolvent. The Federal Reserve is injecting money into the economy through the

purchase of assets. Generally, this is a move adopted has come after lowering of the interest rates

to zero.

The Federal Reserve is extending benefits to those sick with Coronavirus so that they can

stay at home and reduce the spread. The financial cushion is to help the ill stay away from the
FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 21

public and not engaged in activities to bring incomes. The fiscal policy is getting used so that

there can be availing of loans to the hardest-hit companies. Federal Reserve is giving out loans to

these companies so that they can maintain their obligation of paying the workers even in this

pandemic period when harsh conditions are affecting the economy. The zero rates are incentives

to the companies so that they cannot render the workers unemployed, therefore making the

economy dwindle further.

States are faced with high costs from their endeavors to provide heath and the public

safety measures that they are putting in place. States usually have limited capacity to borrow and,

in most cases, made to cut their spending because of their revenues, which go down (Baker&

Judge, 2020). The Federal Reserve is giving financial support primarily to the hardest-hit states.

Their loans have zero interest rates so that the states can take loans that they can service with

ease. Virtually, this can ensure the continuity of economic activities.

International Monetary Fund has projected that there will be government spending and

revenue measures that will get undertaken by governments in the world so that economies can

get sustained and they will amount to $3.4 trillion. Globally, equity injections, guarantees, and

loans will be $4.6 trillion. Economies around the world want to maintain smooth running

markets so that credit can go on flowing. Federal Reserve has bought $200 billion of

government-guaranteed mortgages and more than $500 billion of Treasury securities. Notably,

this is meant for a more comfortable transfer of the monetary policy to the financial institutions.

There is a program that has been revived when there is a global financial crisis called the

Primary Dealer Credit Facility (PDCF). The Federal Reserve has taken the initiative to give

loans to the top 24 financial institutions in the country. They are required to pay the loans after
FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 22

90 days at an interest rate of 0.25%. In return, these financial institutions are required to give

Federal Reserve investment grade debt securities, equities, and also municipal bonds and

commercial papers as collateral. The main aim is to ensure continuity of the credit markets at this

time, the economy is stressed, and the people, as well as institutions, are increasingly avoiding

risky assets and hoarding of money for a precautionary motive. There is a risk that can arise from

financing the rising inventory of securities posed to the financial dealers as they seek markets.

Treasury Secretary is the one who gives the go-ahead to invoke emergency lending authority to

have a clear go-ahead.

It has taken measures to lend to the banks and lowered the interest rates from 1.75 % to

0.25%. They are overnight, so they get paid in the morning of the next day. Banks also offer

collaterals so that they can get cash. But due to this pandemic situation, the Federal Reserve is

not taking much of risk-averse measures to dispatch these loans (Loayza & Pennings, 2020).

Without money, the banks will be rendered operational because there will be no individuals who

deposit can go on withdrawing cash. Federal Reserve is giving discounts to banks, but banks are

fearful that in case it leaked out that they were offered discounts, there would be panic with the

depositors thinking that the bank is on the verge of collapse.

The Federal Reserve has eased regulatory requirements for banks temporarily so that the

banks can have surplus to lend. The reserve that banks should have to meet cash demand has

been suspended, which is one of the moves adopted by the Federal Reserve to salvage the

economy. The banks have been authorized to dip deeper into their liquidity and buffer stocks and

ensure that they have a lot to lend in this Coronavirus period (Baker& Judge, 2020). Banks have

also suspended buying back of their shares. Federal Reserve has authorized those big companies

to be lent money. Generally, this can be done by purchasing their bonds and also giving them
FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 23

loans. Notably, this is done by Secondary Market Corporate Credit Facility (SMCCF), who buys

the company's corporate bonds and even exchange-traded funds. The facilities formulated by

Federal Reserve will help companies access loans so that they can run their activities that include

paying workers and getting raw materials for operations. Initially, Federal Reserve set aside $100

billion, but that figure has swelled to a tune of $750 billion in corporate debt.

There is a crisis-era program known as Commercial Paper Funding Facility (CPFF),

which gives short-term unsecured loans to particular market funds. The money is used for day-

to-day activities. Federal Reserve purchases commercial paper, and it leads directly to the big

companies. Notably, this helps the companies to sustain employment and investment required for

the economy to continue being vibrant. The named two facilities help finance micro-businesses

that do not require Federal Reserve intervention.

Small and medium companies, those with 15,000 employees and also annual revenue of

$5billion, are funded by Priority loans and Expanded Loans Facility. Federal Reserve funds a

total of $600 billion that is paid after four years. Federal Reserve has started lending directly to

consumers, households, and small businesses with its crisis-era facility called Term Asset-

Backed Securities Loan Facility (TALF). Those seeking the loans have to bring forth collateral

securities, which include commercial mortgage-backed securities. The loans include credit card

loans, student loans, auto loans, and those guaranteed by SBA. The interest is at zero so that

people can take without fear of repaying with high-interest rates. Federal Reserve is also helping

municipals through its credit facilities. It is assisting through municipal bond liquidity where the

municipals will offer commercial paper backed by municipal securities that get exempted from

taxation. Notably, this will help the banks to give out cash to the municipal market, and it will

help bring about liquidity.


FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 24

Federal Reserve will ease rates on other currencies so that the country can swap dollars

with other nations at low rates. The dollars will not only get availed to central banks that they

swap with like Eurozone, Canada Brazil, Japan, but it will increase those central banks to include

new ones (Bahaj & Reis, 2020). Repo facility that deals with foreign monetary affairs will open

lines to other central banks that have no swap line with the U.S. so that dollars can be availed to

other nations and act as a precautionary motive. The central banks will pay the dollars in a much-

reduced interest rate and also an extended maturity date.

The actions by the Federal Reserve are essential because they will help ease the

economic downturn that leads to a recession. Fit is trying to ensure that credit flows to the

households and businesses hard hit by the Coronavirus and have no other measure to counter it

given there is unemployment and business are finding it to sustain their operations. Reducing

interest to zero is a good move because it will attract borrowing than when it remains where it

was. Interest rate is the cost of obtaining the loan, and putting it at zero is an excellent way to

attract borrowers and, at the same time, ensuring there is liquidity and the economy is not under

recess.
FEDERAL RESERVE INTEREST RATES AND EFFECTS ON THE U.S. ECONOMY CURRENTLY 25

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