The International Monetary Fund has forecasted that the global economy is expected to contract by 3 percent this year due to the economic damage caused by COVID-19 to cripple global output. In the United States, the I.M.F has projected that the US economy will contract as much as 6 percent by the end of 2020. The Federal Reserve in the United States has taken several steps to mitigate the economic damage imposed by the still-evolving COVID-19 global pandemic using several monetary policy tools.
Some actions the FED has taken have been reducing reserve requirements to zero and cutting interest rates to range from 0% to 0.25%, this range is down from the previous 1% to 1.25% range. So, how do these actions help? Reducing the reserve requirement lowers the amount of cash banks are required to hold in reserves and have on hand each night. Lowering the reserve requirement to zero allows banks to make more loans to household consumers and businesses since it is not required to be held in reserve. Similarly, this action is also meant to increase the nation’s money supply. Slashing rates to zero encourages economic growth. By lowering rates, it encourages more money to be put into the economy. This then encourages businesses to invest more and encourage household consumers to spend more money and borrow more money. Lowering rates also helps to keep a line of credit and cash flowing smoothly throughout the economy to try to stabilize it.
Additionally, the FED has taken an extraordinary step by announcing a comprehensive action to inject $2.3 trillion into the economy, on top of an already existing $2 trillion fiscal stimulus package enacted by Congress and President Trump. The interesting thing about this action is, for the first time ever, extending help to state and local governments. This action helps state and local governments by setting up a program called the Municipal Liquidity Facility. This Facility will provide up to $500 billion in lending power to state and local governments who are struggling to manage cash flow and have a strain on their cash flow due to the effects of combating COVID-19. Another program created in this action is the creation of a Main Street Lending Program, which is intended to ensure credit flows to mid to small-sized businesses with up to $600 billion in loans over a course of four years. It offers loans to companies employing up t0 10,000 employees and has a revenue of less than $2.5 billion per year. Some other requirements include: Companies seeking out a loan must still remain committed to maintaining workers and payroll in a reasonable way as well as being subject to direct loan restrictions imposed by the CARES Act, which include compensation, stock repurchase, and dividend restrictions.
The purpose of this action is to bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program as well as supporting the CARES Act. The way it bolstered the effectiveness is by keeping a steady supply of cash to financial institutions so those institutions can lend money to small businesses.
By taking these actions, the FED has taken steps to mitigate the damage already done, try to remain stabilized, and try to prevent the economy from suffering a collapse. As this crisis continues to develop, we may see more actions taken by the FED.