by Alexander W. Salter
The American Institute for Economic Research
Of all the policy responses to the COVID-19 pandemic, the Federal Reserve’s is the most extraordinary. Many people are unaware of the Fed’s recent behavior. Monetary policy is not the most visible of government actions, after all. But this time, the public cannot afford to ignore what the Fed is doing. In short, the US central bank has completely abandoned the long-established norms and procedures for conducting monetary policy. Its new interventions threaten to undermine the integrity of financial markets for years to come.
Some of what the Fed has done is in line with monetary policy orthodoxy. For example, it has cut both its target for the federal funds rate (the usual “policy lever” for conducting monetary policy) as well as the discount rate (the interest rate the Fed charges for loans). It has also cut reserve requirements. Read any monetary economics textbook, and these three policy options will be prominently discussed.