The Usa Economic Policy During The Covid-19 Pandemic.pdf

The Fed, which originally created the program during the Great Recession, restarted it on March 15, 2020.. The Fed enormously expanded its repo operations on March 12, 2020, by $1.5 tril

VIETNAM NATIONAL UNIVERSITY HCMC

INTERNATIONAL UNIVERSITY

SCHOOL OF BUSINESS

[ INTRODUCTION TO MA TO MACRO ECONOMIC CRO ECONOMIC

The USA Economic Policy during the Covid-19 Pandemic

Group Members Trinh Ngoc Nhan BABAAU19016

Pham Le Bao Tran BABAAU19009 Nguyen Duc Nha CECEIU18081

Do Ngoc Huong BABAIU19200

Le Quan Hung BABAIU19196

Ly Phuong Thanh BABAIU18187

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Contents

I Introduction 3

II Body 4

1 Overview 4

2 The economic policy 6

a) Monetary Policy 6

b) Fiscal Policy 11

III Conclusion 17

I Introduction 

In the past few months, the world has been confronting a serious pandemic called Covid-19. This pandemic has led to nearly 450,000 deaths (updated on June 15th

 2020). It started from Wuhan; China in December 2020 then spread to 215 countries or regions (including 2 cruise ships) around the world. Coronavirus disease transmits primarily through droplets

of saliva or discharge from the nose when an infected person coughs or sneeze. Covid-19 is now a global pandemic, therefore, the implementation of widespread restrictions on social contact to stop the spread of the virus has been announced Since then, global stock markets have suffered dramatic falls due to the outbreak. The economic damage caused by the COVID-19 pandemic is largely driven by

a drop in demand, meaning that goods and services consumption, hospitality and tourism have been frozen. To slow down the spread of the virus, many countries have closed their borders and restricted travelling . This reduction in consumer demand causes airlines to lose planned revenue, their expenses need to be cut down by decreasing the number of flights they operate. The same dynamic applies to other industries, for example with falling demand for oil and new cars as daily commutes, social events and holidays are no longer possible As companies start to lay off staffs to make up for lost revenue, the new number of unemployed workers might result in an economic downfall  Not only has the Covid-19 affected the world economy but this outbreak also impacts on all segments of the population Social groups that are most likely to be vulnerable in this pandemic include the poor, the elderly, the disabled, youngsters and native people To those who are homeless, they may be unable to be safely sheltered and easily facing the massive invasion of coronavirus, the whole world is suffering not only health catastrophe but also economic crisis, even the most developed country 3 the U.S., cannot escape from this 5game6

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Overview 

As the coronavirus (COVID-19) spreads through America8s biggest cities, its effect is being felt far beyond the over 2 million Americans who are confirmed infected The quarantines and lockdowns that are needed to fight the virus8s spread are freezing the economy

To understand how COVID-19 impacts the economy, consider its effect on different industries Firstly, look at the Gross Domestic Product (GDP) of the USA Consumption accounts for 70% of the GDP; however, businesses have to close, which shut down all consumers8 activities According to the Congressional Budget Office (CBO), COVID-19 pandemic would reduce the scale of economic output

by approximately $7.900 billion in the next decade in real term, 3% of GDP Investment which occupied for 20% of GDP, has stopped because investors want to wait for clarity

on the full cost of COVID 19. It is not until quarantines are lifted that all entertainment businesses can -open back, but at the moment, they are still struggling with the complicated situation of the pandemic, which is the obstacle for gaining profit. Global supply chain is frozen, which affects manufacturing seriously since this industry makes up 11% of the U.S 8s GDP The stock market has rallied through April and large parts of May, recovering much of the losses incurred in the early weeks of the pandemic

 Figure 1: On Wednesday, Nasdaq,

S&P 500 and Dow Jones, closed at

10,020, 3,190 and 26,990 points,

respectively, up 43, 45 and 46 percent

from their March troughs While the

latter two are still slightly in the red for

the whole of 2020, the tech-heavy

Nasdaq moved into positive territory in

early May and climbed to a new

all-time high in the beginning of June

As the pandemic continues raging, companies have no choice but lay off so as to reduce the payroll since their revenue slumps rapidly. The US economy lost 20.5 million jobs in April, the Bureau

of Labor Statistics reported Those losses follow steep cutbacks in March as well, when employers slashed 870,000 jobs Those two months amount to layoffs so severe, they more than double the 8.7 million jobs lost during the financial crisis. The U.S Congress has passed a massive stimulus bill that provides for hundreds of billions in new spending, expanding unemployment insurance and providing

a cash handout to low and middle-income Americans, which should help laid off workers make ends meet until the economy begins to recover. the coronavirus pandemic stings not only because of the public health crisis it has inflicted but also because it wiped out nearly that whole decade of job 4

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recession, a sign the economy is headed toward recession

In that mess, the U.S has made a great effort to bring back everything, among hundreds of solutions have been applied, the two policies: Monetary and Fiscal are considered to be outstanding moves and appropriate choices for its economy to recovery. 

Monetary Policy 

The Fed's stimulus of monetary policy is achieved through 3 main channels: interest rate cuts, loans and asset purchases, and regulation changes. The first two operations (Interest rate cuts, loans and asset purchases) are the two main ways that Fed can actively control the money supply   The Fed cut its benchmark interest rate, the fed funds rate, twice during March 2020, once by 0.50% and a second time by 1.00%. This lowered the fed funds rate, which is expressed as a range, from 1.50%-1.75% to 0.00%-0.25% This is notable because the Fed hadn8t moved interest rates in increments greater than 0.25% since it cut them during the Great Recession On March 15, 2020, the Fed also cut its "discount rate," another key interest rate, by 1.5%, down to 0.25%. Lower Interest rate

is one of the strongest methods in macroeconomic to control the money supply By far, lower interest rate would help one country8s money supply to increase in a short amount of time without the time lag from the market. This would stimulate the firm to maintain not only one 7s original businesses but also

Loans and asset purchase intervention from Fed was more extensive, covering a wide array of programs The simplest asset purchasing program is the quantitative easing (QE) program, in which the Fed directly buys assets like U.S. Treasurys and mortgage backed securities (MBS). Treasurys are -the US Treasury securities which are government debt instruments issued by -the United States Department of the Treasury. The Fed, which originally created the program during the Great Recession, restarted it on March 15, 2020 The scale of the program is currently open-ended, with the Fed saying it will buy "in the amounts needed to support the smooth functioning of markets." Moreover, these operations have been used in rough time recession such as the 2008 stock market crash

The main goal of Fed 7s large scale open market operation is to increase the economy money supply which stimulus the economy. The Fed enormously expanded its repo operations on March 12,

2020, by $1.5 trillion dollars, then adding another $500 billion on March 16, to ensure there was enough liquidity in the money markets Repo operations effectively allow the Federal Reserve loan money to banks, by purchasing treasurys from them, and selling them back to the banks later. As we all know, it is necessary that the bank must have enough liquidity to support its institution. The Flow of the market would be interrupted, causing a market fall out likewise a domino effect In case of the bank 7s failure to lend, the Fed will function itself to act as a general lender in a market. 

Besides direct asset purchases, the Fed set up several programs that opened new, specific lines

of credit to financial institutions. These methods would have a time delays effect in comparison to direct lower interest rate and direct asset purchases; however,  it might look to have an indirect effect

to the economy, it is still a direct way to get the capital the one who are hurt the most financially in the pandemic crisis. On March 20, 2020, the Fed relaunched a Great Recession-era program, the Primary

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corporate bonds as collateral There is no set limit to the amount of credit it will issue, but it will only run for 6 months unless it is extended. If the pandemic tends to draw out longer than which the market can sustain, the Fed will have to reissue this program. 

To add more liquidity to money markets, the Fed launched the Money Market Mutual Fund Liquidity Facility (MMLF) on March 18, 2020 This program lends money to financial institutions so they can buy money market mutual funds The MMLF is similar to the AMLF program launched in

2008 after the collapse of Lehman Brothers caused a major money market fund to fail The program does not have a specific lending limit but is currently scheduled to end on Sept 30, 2020 The treasury department gave the MMLF $10 billion of debt credit protection for the program On June 5, 2020, the Federal Reserve said that participation in the MMLF wouldn't affect the liquidity coverage ratio of participating banks. On a large scale of thing, MMLF program would help to provide more money supply to the market, helping with the economy 7s current shortage of money supply. 

To help small businesses, in concert with the CARES Act, the Fed launched the Paycheck Protection Program Lending Facility (PPPLF) on April 9, 2020 This program lends money to banks

so that they can, in turn, lend money to small businesses through the Paycheck Protection Program. On April 30, 2020, the program was expanded the types of lenders who can participate in the program. There is no current limit to the amount of credit that can be extended through the program, but it will stop extending credit to the program on Sept 30, 2020. On June 5, 2020, the Federal Reserve said that participation in the PPPLF wouldn't affect the liquidity coverage ratio of participating banks. This announcement from the Fed, however, is just a way to maintain the market situation. PPPLF would affect the liquidity coverage ratio in the short-term when the program is still in

burdens on other Banking institutions

The Fed created several new programs that establish legal entities known as, special purpose vehicles, to make specific loans or purchase assets indirectly On March 17, 2020, the Fed established the Commercial Paper Funding Facility (CPFF), which purchases short-term debt known as commercial paper to ensure those markets stay liquid On March 23, 2020, the Fed broadened the variety of commercial paper it would lower the pricing of the debt it buys This is actually a relaunch

of a program begun during the Great Recession, when many businesses were hurt as liquidity in the commercial paper markets dried up While it has no set limit on the amount it will purchase, the CPFF will stop purchasing debt on March 17, 2021, and the SPV will continue to be funded until its assets mature The Treasury Department made a $10 billion equity investment in the CPFF from its Exchange Stabilization fund. 

On March 23, 2020, the Fed created the Primary Market Corporate Credit Facility (PMCCF) to buy corporate bonds to ensure corporations can get credit At the same time, it created the related Secondary Market Corporate Credit Facility (SMCCF), which buys up corporate bonds and bond ETFs on the secondary market The combined purchase limit for the programs is $750 billion, up from

an initially $200 billion The Treasury Department contributed a total of $75 billion in initial capital to these two programs from the ESF, $50 billion for the PMCCF, and $25 billion for the SMCCF The premise is that this program makes banks more willing to lend to corporations, because they know that they can sell the loans to the Fed Both programs will stop purchasing bonds on Sept 30, 2020, and they will continue to be funded until their holdings are sold or mature. 

Also, on March 23, the Fed resurrected an old program from the Great Recession, the Term Asset-Back Securities Loan Facility (TALF) It will make up to $100 in loans to companies and takes

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on auto loans, commercial mortgages, or student loans The Federal Reserve expanded the types of ABS that could be purchased on April 9, 2020. The Treasury Department8s ESF will make a $10 billion initial equity investment in the SPV It will stop extending credit on Sept 30, 2020

On April 9, 2020, the Fed announced the Main Street Lending Program, which sets up an SPV that will purchase up to $600 billion in small and medium-sized business loans. The Fed will only purchase a 95% stake of each loan, with the bank keeping 5% To qualify, businesses need to have 10,000 or fewer employees or have $2.5 billion or less in 2019 revenue It will purchase stakes in both new loans and loan extensions, and under the CARES Act, the Treasury Department will make a $75 billion equity investment in the SPV On April 30, 2020, the Main Street Lending Program was expanded in several ways The number of maximum employees was raised to 15,000 or fewer, and the annual revenue was $5 billion or less The minimum loan size was lowered to $500,000, and a third type of loan was added allowing the Fed to purchase 85% of loans to more heavily leveraged companies It will continue to purchase stakes in loans until Sept 30, 2020, and it will continue to be funded until its assets mature or are sold. 

Also, on April 9, 2020, the Fed announced the Municipal Liquidity Facility (MLF), which will purchase up to $500 billions of short-term notes issued by U.S States (and D.C.), counties with at least

2 million people and cities with at least 1 million On April 27th, the population required to receive aid was lowered to 500,000 people for counties, and 250,000 people for cities The April 27 change also changed raised the maturity limit on eligible securities from 24 months to 36 and allowed Multi-State Entities to sell bonds to the facility. On June 3, 2020, the facility was broadened further to allow smaller states to designate their most populous city and/or county to eligible for the facility even if they don't meet the population requirements In addition, each state can designate two "revenue bond