Monetary Policies: Us Government to Mitigate the Effects of Covid-19 (Essay Sample)

MONETARY POLICIES INTRODUCED BY THE US GOVERNMENT TO MITIGATE THE EFFECTS OF COVID-19
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Monetary Policies Introduced by The Us Government to Mitigate the Effects of Covid-19
Covid-19 presented unprecedented and irrevocably very challenging situations to most modern world economies. The central banks and the governments of the affected countries had to implement fiscal and monetary policies to counteract and mitigate the effects of the pandemic on their economies. Global central banks have made unprecedented efforts to minimize economic consequences and promote recovery with financial institutions. While financial institutions have essentially followed the blueprint of the global financial crisis, the degree, complexity, and velocity with which they have responded to the pandemic are unprecedented. The US government was significantly and massively affected by the callous pandemic that hit the world unanticipatedly. The virus has wreaked havoc on lives, overwhelmed the healthcare system, and triggered a global economic slump. To mitigate the effects, the US government introduced monetary policies which would irrevocably curb the effects. Therefore, it is plausible and prudent to review the measures introduced by the Central bank as it will immensely abet in comprehending the rationale behind the actions. Understanding the cause and the birth of the monetary policies will significantly assist in critically analysing the impact of the financial policies on the economy by applying economic data and theory to the analysis.
Review and the Rationale behind the Monetary Policies Introduced by the Central Bank
The monetary policy incorporates the tactics and operations conducted by the Central Bank to guarantee that the monetary base in the economy is congruent with the administration's prosperity and price aspirations. Monetary policy strives to sustain price stability across the economy (Benmelech and Tzur-llan,2020) (Benmelech and Tzur-llan,2020). In the United States, monetary policy is described as the Federal Reserve's operations and interactions to foster economic expansion, price stability and other financial objectives established by Congress (Epstein and Schor,2019). The most predominant monetary policy tools utilized in reaction to the Covid-19 crisis by the Federal bank include the interest rate measures, expanded lending operations and Asset purchase programs.
The Interest Rate Measure
Interest rate is the most effective tool in maintaining price stability and ensuring a continuous flow of money in any economy. The central bank controls the amount of money in the economy by either raising or lowering the interest rates for the banks. The interest rates affect the financial institution's saving and lending processes. When the central bank wants to plummet the money circulation, it increases the lending interest rate. It reduces the interest rate when it wants to surge money circulation in the economy. Interest rates massively affect financial intermediation and monetary policy transmission (Wang,2018). During the covid-19 period, the United States faced plummeting money circulation in the economy due to slumping economic growth and price stability caused by the skyrocketing number of retrenched people from firms and increased number of infected and deaths due to the virus.
In the United States, the coronavirus outbreak – and the resulting layoffs, events postponement, and work-from-home regulations – precipitated a severe economic collapse. The quick contraction and widespread anxiety about the virus and the economy's trajectory prompted a desire to hold only highly liquid assets, as well as the unstable capital markets, which threatened to worsen an already dire situation. The Federal Reserve acted with a variety of initiatives to maintain credit flow and reduce the economic impact of the pandemic.
One way the Federal Reserve intervened was through the federal funds rate. The federal reserve explicitly controls the interest rates through which banks pay to borrow from each other. During the early phases of the crisis, the Federal Reserve slashed policy rates substantially. However, the magnitude of rate decreases has been substantially less than during the global recession. In 2020, regulation rates in the United States hit the negligible lower limit. Despite significant interest rate cuts, interest rate spreads expanded during the outbreak as a result of large capital outflows. Lending costs went up, impeding their ability to execute appropriate budgetary reforms. At its March 3 and March 15 meetings in 2020, the Federal Reserve cut its federal funds rate, the rate at which banks lend to one another overnight, by a net 1.5 percentage points (Yilmazkuday,2021). The financing rate was reduced from 0% to 0.25% as a result of these decreases (Yilmazkuday,2021). Due to the fact that the federal funds rate acts as a guideline for other short-term interest rates and has an effect on extremely long interest rates, this move was meant to stimulate spending by lowering the cost of borrowing for individuals and businesses.
Expanded Lending Operations
Lending operations are how financial institutions lend money to persons who need financial assistance by accumulating credit on the customer's side.  The customer is compelled to pay interest on the loan. Nevertheless, some of these loans carry extraordinarily high-interest rates. The loan can be for a few days or upwards to 30 years, at which stage it must be refunded. The US federal reserve expanded its lending operations to ensure the maintenance of the price stability in the economy. The expanded lending operations targeted the banks which relied on the Federal reserve as their last resort. The operations aimed to offer banks and other financial institutions short-term liquidity, which implicitly translated to the availability of liquidity cash for firms and families to borrow during the pandemic. Therefore, the expanded lending operations turned out to be one of the essential and paramount monetary policies enacted by the Federal Reserve.
Assets Purchase Programs
An asset purchase program is one of the most effective monetary tools employed by the central banks to ensure there is money circulation and price stability in an economy. The tool enormously assists in maintaining stability regarding the inflation needs of the economy. An asset purchase program is designed on a financial institution’s balance sheet. The bank buys a variety of financial assets and performs the fixed-rate funds supply operation against collective securities in order to promote a fall in longer-term market interest rates and a decrease in risk premiums, so enhancing monetary policies further. Central banks implement asset purchase programs in order to keep the economy afloat. They have a severe and long-lasting effect on financial institutions, the banking industry, and funding to non-financial enterprises (Lewis and Roth,2019).
Considering the interest rate at or near the zero lower limits, the US government's primary economic mechanism has become bond purchase programs. The overarching goal of these large-scale initiatives, usually referred to as quantitative easing (QE), is to promote economic production by lowering borrowing costs and increasing credit flows and expenditure in order to boost employment and economic development. Since the pandemic, the US central bank have added over $10.2 trillion in security holdings to its already gigantic balance sheet, bringing its total assets to more than $25.9 trillion (United Nations,2022). The Fed has been purchasing $120 billion in securities each month, amassing $2.6 trillion in home loan assets (indirectly assured by the US treasury) and $5.5 trillion in US Treasury securities (United Nations,2022). The surge in the investment in the APP by the United States clearly illustrates the role of APP in ensuring price stability in any economy.
Impact of the Asset Purchase Program on the Macroeconomy
Although it is hard to eliminate the effects of APPs from all other monetary policy instruments, considerable agreement has been reached that they have been an effective tool for raising market liquidity and relieving financial conditions during times of severe financial crisis and market disruption. At the start of the Covid-19 outbreak and the global financial crisis, the US central bank's huge asset purchases dampened the majority of pressures interconnecting financial markets and the real economy. Similarly, in the United States, the APPs appear to have aided in the maintenance of financial markets during the pandemic's early stages by alleviating market stress. T he US central bank's innovative APPs have had a greater influence on domestic bond rates than traditional policy rate cuts. The initiative made a substantial contribution to the country's economic stability during the Covid-19 period.
The Asset purchase program aided in the recovery of the economy. The APPs have primarily succeeded in reviving the real economy by maintaining meagre long-term borrowing costs and rising asset prices. Bernanke (2020) projected that in 2014, every $500 billion in quantitative easing reduced the 10-year treasury rate by 20 basis points. Suppose today's transmission mechanism is similar to 2014, the Fed's approximately $4 trillion in total securities purchases reduced US government rates by 160 basis points. The programs have also pushed up asset prices by decreasing long-term interest rates, enhancing families' and busin...