Answers That Count - Hosted By Charles Musgrove
Business:Management
In this episode, we talk with FSU Economics Professor, Joe Calhoun about the impact COVID has had and will have on the economy. We discuss the Fed's tools to stimulate the economy, like creating money and dropping the interest rate and the likely impact these actions will have to inflation and recovery. Also, tools available to the legislative branch, like loan programs and the Paycheck Protection Program paired with the Fed's tools can have a significant impact on inflation, deflation, interest rates and other big picture economic measurements. Check out this episode for economics 101 mixed with COVID crisis.
Central banks have three main monetary policy tools: open market operations, the discount rate, and the reserve requirement. Most central banks also have a lot more tools at their disposal. Here are the three primary tools and how they work together to sustain healthy economic growth.1
Open market operations are when central banks buy or sell securities. These are bought from or sold to the country's private banks. When the central bank buys securities, it adds cash to the banks' reserves. That gives them more money to lend. When the central bank sells the securities, it places them on the banks' balance sheets and reduces its cash holdings. The bank now has less to lend. A central bank buys securities when it wants expansionary monetary policy. It sells them when it executes contractionary monetary policy.12
Quantitative easing is open market operations on steroids.3 Before the recession, the U.S. Federal Reserve maintained between $700-$800 billion of Treasury notes on its balance sheet. It added or subtracted to affect policy, but kept it within that range.4 QE almost quintupled holdings of Treasury notes and mortgage-backed securities to more than $4 trillion by 2014.56
The reserve requirement refers to the money banks must keep on hand overnight. They can either keep the reserve in their vaults or at the central bank. A low reserve requirement allows banks to lend more of their deposits. It's expansionary because it creates credit.
A high reserve requirement is contractionary. It gives banks less money to lend. It's especially hard for small banks since they don't have as much to lend in the first place. That's why most central banks don't impose a reserve requirement on small banks. Central banks rarely change the reserve requirement because it's difficult for member banks to modify their procedures.7
Central banks are more likely to adjust the targeted lending rate than the reserve requirement. It achieves the same result with less disruption.
The fed funds rate is perhaps the most well-known of these tools. Here's how the fed funds rate works. If a bank can't meet the reserve requirement, it borrows from another bank that has excess cash. The interest rate it pays is the fed funds rate. The amount it borrows is called the fed funds.8 The Federal Open Market Committee sets a target for the fed funds rate at its meetings.9
Central banks have several tools to make sure the rate meets that target. The Federal Reserve, the Bank of England, and the European Central Bank pay interest on the required reserves and any excess reserves.10 Banks won't lend fed funds for less than the rate they're receiving from the Fed for these reserves.11 Central banks also use open market operations to manage the fed funds rate.12
The discount rate is the third tool.13 It's the rate that central banks charge its members to borrow at its discount window.14 Since it's higher than the fed funds rate, banks only use this if they can't borrow funds from other banks.
Using the discount window also has a stigma attached. The financial community assumes that any bank that uses the discount window is in trouble. Only a desperate bank that's been rejected by others would use the discount window.15
Central bank tools work by increasing or decreasing total liquidity. That’s the amount of capital available to invest or lend. It's also money and credit that consumers spend. It's technically more than the money supply, known as M1 and M2. The M1 symbol denotes currency and check deposits. M2 is money market funds, CDs, and savings accounts. Therefore, when people say that central bank tools affect the money supply, they are understating the impact.16
The Federal Reserve created many new and innovative tools to combat the 2008 financial crisis. Now that the crisis is over, it's discontinued most of them. They are ready for the Fed the next time a crisis looms.17
Central banks often hold three major monetary tools for managing money supply. These are:
These tools can either help expand or contract economic growth.
Monetary policies are aimed to control:
Aside from the three traditional monetary tools, the Federal Reserve possesses new, innovative ones, most of which were contrived to cope with the 2008 recession.
The Cost of Government Meddling! Lockdown, Masks, Taxes, etc.
Emerging Medical Marijuana Product from California!
A Fragmented Economic Recovery, Winners and Losers Post COVID!
Positive Changes Caused by COVID - Yes, There Are Many! And, the Influence of Prices in Economy!
Simple Tips to Safeguard Against Cybersecurity Hackers! They Want Your Stuff!
COVID's Economic Impact to College Towns Like Tallahassee!
There Are No Free Lunches, Explained by Professor Joe!
Incentives Matter & The Laffer Curve Explained by Professor Joe!
A COVID Therapeutic for Your Business is Tenacity and Hospitality!
Best Practices for Social Media Posting for Your Business, Where, When and How!
The COVID Impact from the Perspective of a Restaurant Owner! A Real Life Account
This 5-Step Process Improves the Entrepreneur's Success!
SBA 504 Loan - Now Could be the Time to Re-Fi, Find Out How the SBA Can Pay 6 months of Debt Service!
Do you Have an Exit Plan? Find Why, When and How to Plan for Ownership Transition!
Are you Marketing Your Business the Right Way? Are you Getting Expected Results from the Effort and Dollars Spent? Check this Episode for the Marketing Nuggets!
How to Survive a Recession - To Close, Start A New Business or Hunker Down?
Find out How to File A Claim on your Business Interruption Policy Even with COVID
Check this Out for the Details on How to Maximize the PPP Loan Forgiveness - Based on the Application and Guidance issued by the SBA
Is a Captive Insurance Company a Good Option for Your Business? This Could Provide Business Interruption Coverage for a Pandemic Like COVID-19!
PPP Loan Forgiveness - Understanding the Calculations to Maximize Loan Forgiveness
Create your
podcast in
minutes
It is Free
The Commercial Edge: Unleash the Power of People
The emPOWERed Half Hour
HCI Leadership Revolution
Human Capital Leadership
The Power of Music Thinking
BusinessWISE
Business Wars