Is the Federal Reserve providing too much liquidity?
Former Dallas Fed adviser Danielle DiMartino Booth supports the Federal Reserve’s decision to bail out the corporate bond market and help facilitate small business lending amid the coronavirus outbreak.
Federal Reserve officials agreed during their emergency meeting in mid-March that the coronavirus pandemic posed a threat to the economy, prompting them to slash interest rates near zero and agree to leave them unchanged until the U.S. begins to recover.
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The central bank on Wednesday released minutes from two emergency meetings, held on March 2 and March 15. Policymakers cut the interbank lending rate by 50-basis points after the first meeting and by 100-basis points after the second. At the same meeting, the Fed also said that it will buy at least $500 billion in Treasury securities and $200 billion in mortgage-backed securities over the coming months, a program known as "quantitative easing."
HERE'S HOW EXPANDED UNEMPLOYMENT BENEFITS WORK
In the week following the March 15 meeting, the Fed released plans for more than six new crisis-era lending facilities.
“All participants viewed the near-term U.S. economic outlook as having deteriorated sharply in recent weeks and as having become profoundly uncertain,” the Federal Open Market Committee minutes said. "All saw U.S. economic activity as likely to decline in the coming quarter and viewed downside risks to the economic outlook as having increased significantly."
MORTGAGE APPLICATIONS PLUMMETING
The benchmark federal funds rate is now at a range of 0 to 0.25 percent, down from a range of 1 to 1.25 percent. The cut essentially brought the nation’s interest rate to zero, where it will remain until policymakers are "confident that the economy had weathered recent events and was on track to achieve the Committee's maximum employment and price stability goals," the minutes said.
As far as the eventual economic recovery from the pandemic, officials presented two different scenarios: One in which the U.S. begins to rebound in the second half of the year, and a bleaker one, in which the economy does not start to recover until next year.
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“Participants noted that the timing of the resumption of growth in the U.S. economy depended on the containment measures put in place, as well as the success of those measures, and on the responses of other policies, including fiscal policy,” the minutes said.
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