Central Banks faced the most uncertain economic life during the COVID-19 global pandemic. This chaos revolved around the US Federal Reserve regarding their attempts to strike a balance between price stability and economic recovery. This paper explores how the Federal Reserve coped amidst uncertainty about monetary policy during extreme turbulence. The global pandemic shockwaves caused the global economy’s tailspin. For instance, business closures, broken supply chains, and declining consumer confidence resulted in a severe recession since the Great Depression (Pinshi, 2020). FED is annihilating virtually all conventional economic models and forecasting tools. Predicting forthcoming Economic Activities, Inflation Rate, and Instrument Efficiency of Policy. As such, FED responded uniquely to this situation in its policies. In order to obtain trillions of dollars worth of Treasury bonds and mortgage-backed securities, quantitative easing programs were significantly increased by the Federal Reserve Bank system liquidity (Levin & Sinha, 2020). The bold moves are essential to prevent credit freezes and boost economic activities by injecting liquidity into financial systems.
However, more underpinning than that was happening, and complex fluid internal processes were happening at the time. Consequently, these meetings were taking place hastily, given the fast-changing data and conflicting forecasts on its economic implications. Such risks included unintentional inflation and asset bubbles, thus resulting in lively debates among policymakers, wondering whether they should take aggressive measures. One significant change mFED made included more scenario planning on various parameters and more frequent stress tests than before. In this regard, the Federal Open Market Committee (FOMC) tried to build different alternative economic paths based on some assumptions, enabling them to be better prepared for future contingencies (Bhar & Malliaris, 2021). Communication also significantly affected how the FedFed responded to this situation. Public pronouncements and forward guidance became crucial for managing expectations and maintaining market confidence. Fed hoped that clearly stating their policy goals and explaining the economic reasons behind them would help calm the populace and prevent a panicky reaction of financial markets to an unpredictable future.
The COVID-19 pandemic has shown us that our economic models have limits and that our monetary policies must be flexible. The Federal Reserve’s actions ameliorated the crisis in finance during the pandemic, but its extraordinary measures and far-reaching consequences are yet to be determined (Altig et al., 2020). Critics argue that loose monetary policy promoted asset price inflation, setting up future instability within financial markets. However, it was also a lesson for central banks to keep moving on. It was a period of embracing new information, intense internal debates and talking with people outside. In this increasingly interconnected, uncertain world, central banks will inevitably have to change how they formulate their monetary policies to build resilience and tools to help them overcome whatever lies ahead.
COVID-19 led to a lot of internal debates among FOMC members. For example, Lael Brainard called for drastic measures to save employment among other vulnerable groups to prevent a financial collapse (Levin & Sinha, 2020). On the contrary, Esther George asked about the rise of inflation and asset prices, which increases support for a more cautious approach to avoid unwanted consequences. It is observed that tools are being used and what risks they may carry along, such as underestimating inflation or balancing instant stimulation with long-term equilibrium. The committee resolved conflicts among competing mandates in an uncertain environment through compromises.
However, they had their struggles, like many others who experienced these tremors. There are differences for various reasons in different countries, but central banks’ approaches globally took identical paths (Bhar & Malliaris, 2021). Even though with some variations, global central banks took the same approaches. For instance, the Bank of Japan maintained its ultra-loose monetary policy for years, even after deflation. This is important because it allows us to examine whether various policy instruments would be appropriate for different situations and identify possible best practices for future crises. Equally significant is how IMF can work with the World Bank and align their policies to maintain the world’s financial stability.
However, FedFed tried to minimize its challenges using interventions during the pandemic, where most people think things became complicated afterwards. Nonetheless, this has not created sound investment patterns based on low-interest rates that encourage risk, thereby improving savings rather than spending (Pinshi, 2020). However, these are all complex issues that must be carefully considered and require sophisticated policy options going forward. FED must strike a delicate balance in its emergency measures without precipitating another recession since it requires good communication; just like during this crisis, other possible alternatives may be appropriate and no more economic downturns.
References
Altig, D., Baker, S., Barrero, J. M., Bloom, N., Bunn, P., Chen, S., … & Thwaites, G. (2020). Economic uncertainty before and during the COVID-19 pandemic. Journal of Public Economics, 191, 104274.
Bhar, R., & Malliaris, A. G. (2021). Modeling US monetary policy during the global financial crisis and lessons for Covid-19. Journal of Policy Modeling, 43(1), 15-33.
Levin, A. T., & Sinha, A. (2020). Limitations on the effectiveness of monetary policy forward guidance in the context of the COVID-19 pandemic (No. w27748). National Bureau of Economic Research.
Pinshi, C. P. (2020). Monetary policy, uncertainty and COVID-19. Journal of Applied Economic Sciences (JAES), 15(69), 579-593.
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