How can federal reserve fight recession? Know the Tools of the Federal to fight the recession.
Lower Interest Rates
The Fed can lower interest rates through open market operations by buying debt securities. In return, Fed provides banks with a newly created Lower Fed credit fund. Now with this lower Fed Fund rate, banks loan each other with a lower fed fund rate and it circulates in the economy by passing each other. The reduced interest rates eventually reach the business and individuals. When this cycle works, business gets loans at cheaper rates and thus helps them not to fall into the defaulter’s category.
When the businesses have enough funds at cheaper interest rates to run the organization they don’t think to remove their employees. Thus the employees are protected from the fear of lay-offs. Lower interest rates also empower people to buy goods and services which helps to keep a healthy consumer price index. It eases people to extend their debt rather than living on their existing means.
How can the Federal Reserve fight Recession with Discount Lending? The central bank has a facility to lend to commercial banks to meet their short-term liquidity requirement. This is called a Discount Window. This mostly helps those banks who are unable to borrow from other banks. These banks can head on to the Central Banks’ discount window by paying the federal discount rate.
Fed has already lowered its discounted rate to 0.25% in March 2020. Further discounting looks difficult as it will slip the economy deep into trouble.
How can Federal Reserve Fight Recession through Dual Mandate
In the 1970s U.S Federal Reserve faced simultaneously
high inflation and unemployment, a condition, known as stagflation. To overcome the situation Congress has modified the policies and stated that Fed’s goal should be “maximum employment, stable prices, and moderate long-term interest rates.” These goals are known as Fed’s Dual Mandate and it exists to date. In times of recession, unemployment rises and prices tend to fall. this process is called ‘Deflation’. Using the dual mandate Fed can take necessary actions to suppress unemployment and strengthen prices. This will provide immediate support to the U.S economy and financial system.
Who will get affected by the Recession?
There is a high probability that white-collar professionals will get affected
by the recession. As per the economist, William Lee, Blue-collar jobs and
manufacturing segment demand still exists that will make these segments
recession-proof. This will definitely relieve the concerns of workers
about the economic downturn. On the other hand, the technology sector has announced
a wave of layoffs. Shopify has reported 10% of job losses to its employees,
it is estimated to be 1000 layoffs.