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1 1 (April 13, 2020)

handle is hein.crs/govcuzw0001 and id is 1 raw text is: Researh Sevice Federal Reserve: Monetary Policy Actions in Response to COVID-19 April 13, 2020 The Federal Reserve (Fed) has taken a number of steps to promote economic and financial stability in response to the coronavirus pandemic (COVID- 19). This Insight covers actions related to monetary policy-actions intended to lower interest rates or increase overall liquidity. Due to the severity of economic disruption, actions that increase overall liquidity have not been sufficient to maintain financial stability, and the Fed has also directly lent to firms and purchased private securities. Direct Fed lending and other financial assistance in response to COVID-19 is covered in CRS Insight IN 11327, Federal Reserve: Emergency Lending in Response to COVID-19, by Marc Labonte. Actions to Lower Interest Rates Federal Funds Rate Traditionally, the Fed conducts monetary policy by changing the federal funds rate, the overnight interbank lending rate. In response to COVID-19, on March 3, the Fed reduced the federal funds rate from a range of 1.5%-1.75% to a range of 1%-1.25% to stimulate economic activity. On March 15, it reduced the range to 0%-0.25%. Economists refer to this as the zero lower bound to signify that the Fed's traditional monetary policy tool has been exhausted at this point, and cannot be used to provide additional stimulus. This is the second time this interest rate has ever hit the zero lower bound-the first time was during the 2008 financial crisis. Lower interest rates stimulate interest-sensitive spending, such as business capital spending on plant and equipment, household spending on consumer durables, and residential investment. In addition, when interest rates diverge between countries, lower rates cause capital outflows that put downward pressure on the dollar exchange rate, which in turn stimulates spending on exports and imports. Through these channels, monetary policy can be used to stimulate overall spending in the short run. During the 2008 financial crisis, the Fed developed two other tools to provide stimulus at the zero lower bound-forward guidance and quantitative easing. Both aim to reduce long-term interest rates, which- unlike short-term rates-are not directly determined by the Fed, but are important for stimulating economic activity. These tools are being revived in response to COVID-19. Congressional Research Service https://crsreports.congress.gov IN11330 CRS }NStGHT Prepaed for Membeivs and Cornm ittees o4 Cor~qress ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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