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Management and Economics Research Journal
open access

Monetary Policy Response to COVID-19

DOI : 10.18639/MERJ.2022.1557092

Section : Original Research Article

Published Date : Apr 28,2022

Lede

Abstract

The coronavirus pandemic presents enormous health and economic challenges to the United States and the global economy. The coronavirus disease and the measures taken to contain it led to a severe contraction of the US economy not seen since the Great Depression. The Federal Reserve made a swift response to ensure the stability of the financial market and promote economic growth. Initially, it cut the federal fund rate to its effective lower bound, expanded its long-term asset purchases, and created new reserves much of it used to finance the stimulus and keep the long-term interest rate low. Despite a massive injection of liquidity, the inflation rate remained low until the second quarter of 2021 and there was no pressure to slow the growth of the central bank balance sheet or raise the interest rate. Because of the unexpected surge of the inflation rate in early 2022 to a level not seen since 1982, the Federal Reserve began to raise the funeral fund rate and indicated that it will reduce its asset holdings. If the inflation rate persists, not only contractionary monetary policy but also cuts in federal spending may be required.

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