• Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Skip to footer
  • Canada
  • United Kingdom
  • Subscribe
  • facebook
  • instagram
  • RSS
  • RSMUS.com

The Real Economy Blog

Search

  • Economics
  • Technology
  • Consumer
  • Industrials
  • Finance
  • Real Estate
  • Health Care
  • Life Sciences
Home > Coronavirus > How the Fed responds to economic downturns

How the Fed responds to economic downturns

Feb. 25, 2020 by Joseph Brusuelas

  • email
  • Twitter
  • Facebook
  • Linkedin

Since the 1970s, the Federal Reserve has relied on manipulating expectations of short-term interest rates through cuts in its overnight policy rate in response to economic and manufacturing slowdowns. Reducing interest rates is thought to facilitate investment, which is necessary for economic growth and full employment.

Traditionally, the Fed has cut interest rates during downturns…

These cuts are meant to spur growth…

A cut in the Fed Funds rate has an effect on the entire yield curve by changing the market’s expectations for the path of short-term rates and the risk built into holding long-term securities.

The cuts affect the entire yield curve for Treasuries…

… by changing expectations among investors…

Because recoveries from financial crises have historically been long and arduous, the Fed turned to unconventional policies to drive long-term interest rates lower. The Fed began purchasing long-term bonds, a program known as quantitative easing, adding them to its balance sheet and in the process, reducing the supply of bonds. The effect was to drive up price of bonds and lower market yields.

Investors and policymakers should expect the Fed to reduce rates and possibly resume its quantitative easing program if the coronavirus has a sustained impact on domestic and global production and economic growth.

But with the financial crisis, the Fed needed new tools…

…so it bought bonds in an effort to lower yields and spur borrowing

  • email
  • Twitter
  • Facebook
  • Linkedin

Related posts

  • Fed preview: Difficulty and divided FOMC

    Monetary policy is difficult under the best of circumstances. The cross currents of the trade war, a modest exogenous supply shock in oil markets, political pressure from the executive branch to reduce interest rates are among the factors…

  • Philadelphia Fed's manufacturing gauge weakens sharply in June

    Philadelphia Fed's manufacturing gauge falls in June, registering its lowest level since February when the index registered zero.

  • dot plot graph
    FOMC preview: Real economy in focus at Fed

    The Federal Reserve will keep its policy rate unchanged at its May 1 meeting this week. The committee will also likely update its statement to reflect recent economic data releases and reiterate a focus on inflation that continues…

Filed Under: Coronavirus, Economics Tagged With: coronavirus, Federal Reserve, Joseph Brusuelas, monetary policy, quantitative easing, yield curve

About Joseph Brusuelas

@JoeBrusuelas

Joe Brusuelas, “chief economist to the middle market,” is the preeminent voice championing issues and policies facing midsize companies in the United States and around the world. An award-winning economist, Brusuelas has more than 20 years’ experience analyzing U.S. monetary policy, labor markets, fiscal policy, international finance, economic indicators and the condition of the U.S. consumer.

A member of the Wall Street Journal’s forecasting panel, Brusuelas regularly briefs members of Congress and other senior officials regarding the impacts of federal policy on the middle market and the factors by which middle market executives make business decisions. He also frequently offers his insights on the U.S., Canadian and global economies in the financial media. In 2020, he was named one of the 100 most influential economists by Richtopia.

Before joining RSM in 2014, Brusuelas spent four years as a senior economist at Bloomberg L.P. and the Bloomberg Briefs newsletter group, where he co-founded the award-winning Bloomberg Economic Brief. Earlier in his career, he was a director at Moody's Analytics covering the U.S. and global economies for the Dismal Scientist website. He also served as chief economist at Merk Investments L.L.C. and chief U.S. economist at IDEAglobal.

Primary Sidebar

Other Regions

  • Canada
  • United Kingdom

Categories

  • Economics
  • Technology
  • Consumer Products
  • Industrials
  • Financial Services
  • Real Estate
  • Health Care
  • Life Sciences

Recent Economics articles

  • CHART OF THE DAY: Institutional investors warm to digital assets Jan. 25, 2021
  • U.K. financial conditions, growth and the pandemic Jan. 25, 2021
  • FOMC preview: Addressing market rise in inflation expectations Jan. 25, 2021

RSMUS.com links

The Real Economy

Middle Market Business Index

MMBI Special Reports

Footer

  • Facebook
  • Instagram
  • RSS

About The Real Economy Blog

The Real Economy Blog from RSM US LLP was developed to provide timely economic insights about the middle market economy. It is offered as a complement to RSM’s macroeconomic thought leadership, including The Real Economy monthly publication and the proprietary RSM US Middle Market Business Index (MMBI).

© 2021 RSMUS.com | Privacy Policy | Cookie Policy

The Real Economy Blog
  • Economics
  • Technology
  • Consumer
  • Industrials
  • Finance
  • Real Estate
  • Health Care
  • Life Sciences