Page 16 - 2022 Abstract Book RUICHSS_2022_11_17 after conference

University of Ruhuna ISSN: 2706-0063
Matara, Sri Lanka

Currently, every government is facing challenges in supporting economic
recovery. However, there is no unique solution to this problem; therefore,
governments may make different choices to overcome economic and social
challenges depending on their priorities, aiming to recover hugely impacted sectors
due to the pandemic to support economic recovery. Some experts suggest increasing
investments, increasing revenue while reducing costs, and creating jobs to support
the workforce who lost jobs and people who had to postpone employment
opportunities due to the pandemic.

Let's have some background on the financial landscape in the post-COVID-
19 period. During the global financial crisis, the Fed's expansionary monetary policy
was in line with its dual mandate of maximum employment and price stability, which
necessitated a decline in the unemployment rate and an increase in the inflation rate.

During the early stage of the pandemic, the Fed took similar policy actions
by cutting its target interest rates to zero and quantitative easing as a solution for the
economic recovery from the pandemic. As a result, inflationary pressures from supply
chain disruptions were compounded by a quick recovery in demand and a tighter
labour market.

However, Russia's invasion of Ukraine and its effects on commodity markets,
especially on oil prices and supply chain disruptions, caused high inflation resulting
in a slowdown in global growth, making expansionary monetary policy unsuccessful.
Major problems plaguing the financial system today include inflation at
multi-decade highs, deteriorating economic outlooks in many regions, and ongoing
geopolitical uncertainties that tighten financial conditions despite central banks'
efforts to ease them through interest rate hikes.

In theory, central banks increase interest rates to curb rising inflation and
maintain price stability. A higher interest rate discourages consumption and
investment by raising the minimum lending rate to individuals and businesses. As a
result, inflationary pressures ease as aggregate demand falls.

The Fed raised interest rates for the sixth consecutive time this year, with the
latest hike coming in November 2022. (This brought borrowing costs to their highest
level from zero to 3.75 – 4%). In response to the interest rate hike, inflation was eased
slightly, yet the decline is not compelling enough. This means the federal fund rate is
expected to continue rising in the coming months, even surpassing 4%.

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