Assignment 5c: Monetary and Fiscal Policies Discussion No unread replies

The above article provides details about the bond purchase policy followed by the Federal Reserve. The Fed since June has been buying $120 billion in bonds each month to keep downward pressure on long-term interest rates as a way of giving the economy a boost as it struggles to emerge from a deep recession. The purchases have included $80 billion a month in Treasury bonds and $40 billion in mortgage-backed securities. With the economy showing signs of slowing in the face a resurgence in coronavirus cases and a return to shutdowns in some areas, there has been market speculation that the Federal Reserve could decide to boost the size of its monthly purchases. While no official decision in this regard has been taken till date, the minutes of meeting released show that the Reserve is inclined to consider the same. A policy was also enacted in Spring to bring relief to those who had lost their jobs and means of livelihood due to the coronavirus pandemic. The general theory here is that buying bond will increase the cash flow in the market. If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds. The aim behind the policy of buying more bonds is to stop the interest rates from rising for lending (mortgages). However, experts have argued that it is unlikely that the Fed will implement such a policy at the moment. This is because the long term interest rates are already low and the Fed previously made a promise of keeping the short term interest rates to near zero.[1] Therefore, the policy of buying bonds for reducing interest rates does not make much sense.

[1] https://in.reuters.com/article/us-usa-fed/fed-could-boost-bond-buys-but-wont-for-now-policymakers-say-idINKBN26S3K4