The Federal Reserve’s response to COVID-19 (1/4)
The Federal Reserve monetary intervention was highlighted as an effective mitigation effort in response to the economic impacts caused by the pandemic. The FED slashed US interest rates to near-zero values to encourage spending in the American economy.
Fund rates in early February 2020 sat at roughly 1.58% but by late March, this was reduced to 0.08%. Cutting Interest rates is a simple and common monetary policy to ensure a rise in consumer spending and investment by firms. By adjusting these rates, the FED can influence the volume of demand within an economy, causing an outward shift of Aggregate Demand. This increase can demonstrate economic growth which is especially beneficial during periods of slow growth — the beginning of the CoronaVirus pandemic.
Fluctuations in real GDP (RGDP) can be used to demonstrate the variation in growth caused by the pandemic in the US. Changes in RGDP is a good indicator for measuring growth as it determines the value of all goods and services produced within an economy per quarter. During the first quarter of 2020, RGDP fell 5% from the preceding quarter, by the second quarter it fell 31.4%. The data indicates the impact of a fall in spending which is reflective of the impacts on the US economy.
Unemployment rose to an 80 year high (14.7%) in April 2020 . The FED decision to cut interest rates was effective in mitigating these impacts as by the 3rd quarter of 2020, the US economy grew 33.4% from the previous quarter. Interest Rates, which can be perceived as the cost of borrowing or reward for saving, were instrumental in this as they ensure that firms and households took advantage of loans maintaining spending within the economy.
Although a cut in interest rates was no the exclusive agent in enabling growth, it was influential in facilitating an increase in spending. By legally encouraging consumption, growth was exacerbated but was not the sole cause of an increase in RGDP. Therefore, interest rates were an effective use of monetary policy to mitigate the impacts of COVID-19, in the US.
