Timely & Relevant News: The Fed Pulls Out All The Stops
The Federal Reserve pulled out all the stops last weekend to try and bolster the economy in the wake of COVID-19. But how effective will these measures be? Many commentators responded to the efforts by the Fed with criticism, stating that the only thing that will send the economy on the path to recovery is getting the virus under control.
However, Sonal Desai, Ph.D.Chief Investment Officer, Franklin Templeton "couldn't disagree more". She believes that the action taken by the Fed will have a major positive impact on the economy. She states, "It will help businesses stay open and will reduce the number of layoffs. The people who, thanks to the Fed or the government, keep their job, or have more cash in their pockets thanks to fiscal policy, will still not go to the mall, but they will shop online, they will order food for home delivery, they will not cancel their mobile phones. All this has a positive effect on spending today and through the contagion period."
What Did the Federal Reserve Do?
The news is mostly talking about the fact that the Federal Reserve cut interest rates down to almost 0%. This could have a large benefit to consumers seeking new loans or refinancing existing loans.
Furthermore, the Fed agreed to purchase an additional $700 billion in treasury bonds and mortgage backed securities (MBS), which could help reduce intermediate and longer interest rates.
They also cut the discount rate to 0.25%. The discount rate is what banks pay when they borrow from the fed.
Additionally, the Fed will be partnering with other global central banks to ensure that there is plenty of liquidity.
What Difference Will it Make?
What the Federal Reserve is hoping to accomplish, is not only to help the economy weather the most intense part of the storm, but also to be in a strong position to recover faster, once the virus is contained. Desai stated, "...putting in place extraordinary monetary and fiscal measures today is what will allow us to have a strong, hopefully V-shaped recovery once contagion is contained. As the health emergency recedes, having extremely supportive monetary and fiscal conditions already in place will make a massive difference."
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