Can the Fed save the US economy?


So far, the central bank has clearly failed in its mission, after major US equity indexes lost nearly three percent of their value on Tuesday, despite the bank cutting its interest rate on its funds by half a percent, marking its largest reduction since the global financial crisis in 2008.Despite the markets ’surprise at the time of its meeting, for the first time also since the global financial crisis, the Fed’s decision did not produce the desired results, which casts many doubts about its ability to deal with any upcoming crises.

The situation is further complicated by the fact that while the American unemployment rate has stabilized at one of its lowest historical levels, the Fed has left only 1% – 1.25% of the interest rates controlled, which confirms the expression of the current US economic conditions from a new environment to Much of what the central banks are used to dealing with.

In a research paper released on Wednesday by the Peterson Institute for International Economics, one of the most important centers of economic research in the world, researchers confirmed David Wilcox, a non-resident fellow of the Institute, and David Ravensider, who wrote two years ago in which he discussed the ability of the Federal Open Market Committee of the Federal Bank, To deal with any future recession, the bank must change its approach to dealing with markets in the event of a recession.

According to the researchers, “previous recessions required intervention by the Federal Reserve to cut interest rates by 5%, while current interest levels do not allow this.” With the paper indicating the fact that interest rates on long-term Treasury bonds have reached an all-time low making the bank’s position more difficult to deal with recession, Wilcox emphasized that “in the event that the bank does not change the way it manages monetary policy, it is certain that the next recessions will be Longer and deeper than necessary. ”

The researchers demanded that Fed officials announce clearly what the bank will commit to its work at the time of the recession, and about the timing at which it will begin using quantitative and monetary easing tools at accelerating rates, stressing that vague statements may overthrow the remaining effectiveness of the bank in the markets.

While many economic analysts considered that the reason for the continuing decline in US stock prices on Tuesday after the sudden interest rate cuts by half a percent is that the current crisis is a health crisis, not an economic one, it seemed that the famous Egyptian American economist, Muhammad al-Arian, had preceded everyone, when he said before The bank’s decision to reduce it “that reaching a vaccine that prevents HIV infection will be better than reducing interest rates on the dollar.”

Noting the weakening effect of the Fed’s decision on the markets, the American administration reached a conviction that it is necessary to focus in the current period on confronting the virus, in order to prevent the recession from infiltrating the American economy, after realizing that any monetary or financial policies will not be sufficient, as long as they are not Finding a way to contain the virus and prevent its spread.

On Wednesday, after nearly two weeks of negotiation, the US House of Representatives voted in favor of a decision to direct $ 3.8 billion, entitled Emergency expenditures, to counter the spread of the virus, including $ 3 billion to develop a cure for those infected with it, and what remains of the Centers for Disease Control and Prevention, known In the name of CDC, to be brought to the Senate for a vote before the weekend. And two days ago, Trump confirmed that he would sign whatever amount the Congress decides to agree to allocate to counter the deadly virus. In addition to the natural quest to protect the health of citizens, Trump attaches special importance to curbing the spread of the virus in the United States, after news of its spread caused US stock indexes to drop significantly during the last period.

The US president is counting on the continued recovery of stocks, and the economy as a whole, as the most important pillar of his campaign for his re-election as president next November. And because of his eagerness to raise stock prices to consecutive record levels, and as a sign of the success of his economic policies, Trump has not stopped putting pressure on the Fed to cut interest rates.

On Tuesday, after the Fed announced its decision, Trump called on bank officials to further reduce it, to negative interest rates, as is the case with European Union countries, which he considered to compete with him and his country’s economy.

Since 1998, the Fed has resorted to reducing interest rates on its funds 6 times outside of its announced meeting times, and each time those times, the bank has cut interest rates again at its first meeting after that. After taking the decision this week, Jerome Powell, President of the Federal Reserve, stressed that what the bank means is not the virus, but rather the risks that the economy may be exposed to due to the spread of the virus, adding, “So we decided to intervene after noticing the impact on the growth prospects of the economy.”


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