Thursday, September 24, 2020
University of Oregon professor Tim Duy spoke to the University of Puget Sound economics department on the Federal Reserve’s response to the COVID-19 pandemic. Duy is a UPS alumnus, and continued at University of Oregon to receive his M.S. and PhD in economics. His blog Tim Duy’s Fed Watch keeps readers up to date on new monetary policy and Federal reserve updates.
Duy split his presentation into two parts: first, the direct response of the Fed to the pandemic; second, the innovations that the Fed implemented to update its policy for post-pandemic monetary policy.
“This is not an ordinary recession,” Duy said at the start of the lecture. He explained that while the last two recessions stemmed from financial imbalances that spilled into the real economy, in this episode, a shock to the real economy spilled into the financial sector.
Duy explained that the Fed can respond to recessions in three categories: cut policy rates to zero, large scale asset purchases (in the form of Treasuries, MBS, CMBS), or emergency lending facilities. Emergency lending facilities create backstops should the financial market seize. Duy stated that a successful lending program is one that is not used, or only experiences limited use, for example the combined corporate credit facility or main street lending program.
While these are ways the Fed can cope with the current recession, what happens moving forward in monetary policy? A few years ago, a decline in GDP growth over the past decade coupled with fairly low inflation for an extended period of time prompted the Fed to impose a policy review. This review evaluated inflation, interest, and unemployment rates. The pandemic undoubtedly sheds light onto the economy’s state of health and resiliency, and poses questions regarding not only the economy’s immediate recovery, but also about the future of the U.S. economy’s health and ability to withstand shocks like these.
Follow Tim Duy on Twitter at @TimDuy