Discuss the various monetary policy actions taken by the Federal Reserve to deal with the problems occurring in the economy during the Great Recession.

Question

What will be an ideal response?

Answer 1

The Fed used various methods to combat the recession. In December 2008 a zero interest rate policy was put in place. The goal of this policy was to keep short-term interest rates near zero and stimulate the economy. Open market operations were used to keep the Federal Funds Rate near zero. The Fed found that implementing this program was not enough, a zero lower bound problem occurred. The Fed then responded with quantitative easing or QE. Quantitative easing is a form of open market operations, but is not aimed at lowering interest rates, but rather increasing the quantity of reserves in the banking system. Three different QE occurred, the first in March 2009, then in November of 2010, and finally in September 2012. The last two QE had a special feature known as a forward commitment, the Fed pronounced the dollar amount of securities it was going to purchase each month during the QE. A time limit was set for QE2, but QE3 was to remain in effect until the economy was stable.