The COVID-19 Pandemic has had vast negative implications on the United States Economy as a whole. Consumer spending has plummeted causing company revenues across many industries to decline. Because of this, the Federal Reserve engaged in expansionary monetary policy in March of 2020 in order to reduce interest rates. The goal of this is to stimulate economic activity and promote lower cost borrowing and easier access to cheap credit by consumers and businesses.
Now, almost a month into 2021, the Fed has decided to keep the short-term borrowing rate near zero. This hints to the fact that although the economy may still be growing, it is not close in terms of recovery to where it was before the pandemic. The interest rate has been set between 0% and 0.25%. It has remained at this level over the past seven months when the Fed cut rates even lower in what they described as an emergency action.
Despite the fact that interest rates are already close to zero, making it more difficult for monetary policy to work, Jerome Powell, Chairman of the Fed, believes the Federal Reserve still has ways it can help the economic recovery. According to Mr. Powell, “Is monetary policy out of power or out of ammunition? The answer to that is no, I do not think that. I think that we’re strongly committed to using these powerful tools that we have to support the economy during this difficult time for as long as needed and no one should have any doubt about that.”
Statements from the Fed’s meeting also indicate that the overall state of the economy is a little worse than it was back in September of 2020. It also states that employment and economic activity have been recovering but are still below the levels they reached at the beginning of 2020. The decision to keep interest rates at this lower level are a result of the increase in cases, and discovery of new strains, of the virus that have led to lockdowns once again across the globe. Although economic indicators are not the most promising, the market continued to rally and hardly reacted to this news.
Back in September, the last time the Fed met to discuss interest rates, two members objected the new proposed approach which stated that the Federal Open Market Committee would not raise interest rates until inflation had risen above 2%. In this meeting, however, the decision to keep interest rates low was unanimous.