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Federal Reserve's Monetary Policy During Economic Crisis

The Fed's Exceptional Measures to Support US Economy During COVID-19

Based on the attached article co-authored by Jeffrey Cheng, Dave Skidmore, respond to the following questions:  

1. As stated in the article, one thing the Fed doing to support the U.S. economy and financial markets encouraging banks to lend when eliminated banks’ reserve requirement, i.e., setting the reserve requirement to zero. 

a) The Fed justified this exceptional measure by arguing that it was intended to support the U.S. economy, which was about to be hit hard by the effects of the coronavirus.  Explain why a zero percent reserve margin can increase the likelihood of a run on the bank, i.e., a large number of customers of a bank or other financial institution withdraw their deposits simultaneously over concerns of the bank's solvency. 

2. Identify the country and the limit savers had their withdrawals regardless of the amount they had in their bank account. The article refers to both the federal funds rate and the discount rate.

Summarize each and explain the relationship between the two, i.e., which of the two rate is higher. 

3. Within the article it’s stated “On the monetary policy front, there’s not a lot left. The Fed could cut interest rates below zero—essentially charging a fee for any bank that puts money on deposit at the Fed. Several other central banks have moved to negative rates, but the Fed has said it probably won’t.” 

“President Donald Trump is a huge fan of low interest rates. He’s even gone so far as to praise Germany for its 0 percent interest rate and referred to the Federal Reserve as “boneheads” for not taking U.S. rates lower.” 

a) Identify some of other countries that have actually lowered their interest rates to below zero percent, i.e., negative interest rate. 

b) What is the rationale for setting a negative interest rate?

4.  The author refers to international swap lines.  In March 2020, the U.S. Federal Reserve began sending billions of dollars to central banks all over the world. Last month, it opened up 14 "swap lines" to nations such as Australia, Japan, Mexico, and Norway. A "swap line" is like an emergency pipeline of dollars to countries that need them. The dollars are "swapped," i.e., traded for the other country's currency. The Fed has also started allowing around 170 foreign central banks that hold U.S. Treasury bonds to temporarily exchange them for dollars. (1)

Sending billions of dollars abroad in the middle of a historic economic crisis might seem bizarre.  Why was it done?  Cite your source(s). 

5. While not addressed in this article, the U.S. abandoned the gold standard in 1933 when President Roosevelt cut the U.S. dollar’s ties with gold; however, the U.S. continued to allow foreign governments to exchange dollars for gold until 1971, when President Nixon abruptly ended the practice to stop foreigners from exchanging U.S. dollars for our gold reserves. Therefore, the U.S. currently has a fiat money system, meaning the dollar’s value is not linked to any specific asset. 

a) What exactly is meant by the gold standard?

b) Why did the U.S. abandon the gold standard in 1933?

c) President Trump’s is advocating that the U.S. return to the gold standard and one of his nominees (Judy Shelton) for the Federal Reserve supports that position.  What is President Trump’s rationale for wanting to return to the gold standard?

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