Question

Over the last few years the Federral Reserve (the Fed) has controlled the interes rate to minimum levels to boost the economy. Is this a solution to the recession? If yes, how? If no, why not?

Answer 1

Controlling of the interest rates is one of the effective solution to boost economy and fight recession. However, this is the only base solution to fight recession. Other measures adopted to fight recession revolve around interest rates mostly. It can be seen from following points:

• Adjusting the interest rates as per the requirement of economic conditions
• Selling and buying of US Government Treasury bills and notes.
• Giving cash and credit to various financial institutions.
• Operation Twist has been used to meet unemployment. In this long term interest rates has been reduced. As a result borrowing for businesses and household becomes cheaper. Fed sells short term US debt and use that amount to buy long term US debt.
• Quantitative Easing is also adopted by Fed. In this the Fed will buy mortgages and government bonds. The money will be used to induce consumer spending and also to lower interest rates which will boost the stock market.

During recession people are not ready to spend money. So, Fed reduces interest rate. As a result people want to make use of this attractive opportunity. Borrowing is made cheaper. People will start spending more. This will pump money supply in the economy. This will increase investment in the economy and will help to pull the economy out of recession.

So, controlling of interest rate is the prime solution to fight recession. Other measures to control recession gravitate around it.