Monetary policy run by the Fed and fiscal programs implemented by elected officials will need to pull together in future recessions as well. Both the Fed's crisis response and some of the fiscal aid out of Washington are now set to shrink, which could act as a drag on an economy still emerging from the pandemic, with growth expected to slow in after a healthy rebound this year.
But those programs did produce some unexpectedly fortunate results, notably an increase in household incomes and wealth and a drop in poverty despite the recession. For the Fed, the pandemic cemented its once "unconventional" purchases of U. Treasury bonds and mortgage-backed securities as a core part of monetary policy, the preferred way to continue helping the economy once the central bank's benchmark overnight interest rate, or federal funds rate, has been cut to zero.
Other programs broadened, temporarily, the type of securities the Fed could buy to include municipal and corporate bonds. At a congressional hearing on Thursday, Roosevelt Institute economist Mike Konczal said that should be a permanent part of Fed policy.
Those efforts "were more successful than people realize," in holding down borrowing costs for local governments and companies, Konczal said, and are "an evolution of unconventional monetary policy Other central banks have already broadened the assets they can purchase beyond securities issued and backed by governments. The scale and length of Fed purchases during the pandemic did vex some elected officials, while some policymakers felt the program was providing little benefit in recent months.
That may argue for more flexibility during the next crisis around how and when to end the asset purchases. Those purchases inject money into the economy to lower interest rates and therefore encourage lending and investment.
Such efforts by the Federal Reserve have helped mitigate the economic fallout from the pandemic along with spending on safety net programs such as unemployment compensation and other programs created to provide aid to sectors of the economy hit hardest by the pandemic. We all have a responsibility to build a brighter fiscal and economic future for the next generation.
The Fed first adopted this policy during the financial crisis after it dropped its benchmark interest rate — its main policy tool for affecting short-term market borrowing costs and therefore the overall economy — to virtually zero.
But with its benchmark rate at zero — at the same time that there was no inflation and the economy was still hurting — the Fed was no longer able to use its main policy lever to support workers and stimulate economic growth by making it cheaper to borrow. And so the Fed turned to quantitative easing as a way to continue to provide credit to the economy and further lower borrowing costs for companies and consumers.
By buying assets, their price goes up, which lowers their yield or interest rate. Growing concerns that rising inflation could harm the economy are likely a big part of what led the Fed to change its policy. Inflation is the rate of change in the price of goods and services. The Consumer Price Index , which includes several categories of everyday items that a typical consumers may buy, is the measure of inflation most often reported in the media.
By October , it was up 5. However, the Fed typically prefers the core Personal Consumption Expenditures measure of inflation because, unlike the CPI, it excludes volatile food and energy prices. This other measure, usually lower than the CPI, has climbed a little less, or 4.
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