But in October , the Federal Reserve gained the authority to pay banks interest on their excess reserves. This gave banks an incentive to hold onto their reserves rather than lending them out, thus mitigating the need for the Federal Reserve to offset its expanded lending with reductions in other assets.
The housing sector led not only the financial crisis, but also the downturn in broader economic activity. Residential investment peaked in , as did employment in residential construction.
The overall economy peaked in December , the month the National Bureau of Economic Research recognizes as the beginning of the recession. The decline in overall economic activity was modest at first, but it steepened sharply in the fall of as stresses in financial markets reached their climax. From peak to trough, US gross domestic product fell by 4.
It was also the longest, lasting eighteen months. The unemployment rate more than doubled, from less than 5 percent to 10 percent. In response to weakening economic conditions, the FOMC lowered its target for the federal funds rate from 4. As the financial crisis and the economic contraction intensified in the fall of , the FOMC accelerated its interest rate cuts, taking the rate to its effective floor — a target range of 0 to 25 basis points — by the end of the year.
In November , the Federal Reserve also initiated the first in a series of large-scale asset purchase LSAP programs, buying mortgage-backed securities and longer-term Treasury securities. These purchases were intended to put downward pressure on long-term interest rates and improve financial conditions more broadly, thereby supporting economic activity Bernanke The recession ended in June , but economic weakness persisted. Economic growth was only moderate — averaging about 2 percent in the first four years of the recovery — and the unemployment rate, particularly the rate of long-term unemployment, remained at historically elevated levels.
In the face of this prolonged weakness, the Federal Reserve maintained an exceptionally low level for the federal funds rate target and sought new ways to provide additional monetary accommodation. Vietnam Tourist Arrivals Fall Australia Inflation Expectations Remain High. Calendar Forecast Indicators News. Currency Government Bond 10y Stock Market. More Indicators. National Statistics World Bank.
We have a plan for your needs. Standard users can export data in a easy to use web interface or using an excel add-in. API users can feed a custom application. But the continued fall in the UK unemployment rate, now at 7. But in mid-February he adjusted that stance , saying a wider range of indicators would be taken into account, meaning interest rates could remain at low levels for some time even as unemployment falls further.
More cuts were made as the financial system came close to collapse and a global recession took hold. At the beginning of in the UK, unemployment was rising sharply, business and consumer confidence was severely depressed and banks were holding onto their funds.
The succession of cuts in the cost of borrowing had brought rates down to a historic low, but, with the economy still in recession, more still needed to be done to try to kick-start the recovery. So in March , along with a last cut in rates to 0. While the economic recovery has actually strengthened significantly in recent months, the Bank remains concerned about the sustainability of the recovery and the implications this would have on inflation in the longer term.
It is therefore reluctant to wind down quantitative easing or raise rates until it is more certain that the UK is on a secure path of economic growth.
Back before he was Federal Reserve chair and before the economic crisis struck the United States, Ben Bernanke delivered several well-known talks and papers on the subject of monetary policy in Japan. His theme was to deny that there was nothing the Bank of Japan could do at the zero bound , arguing that a determined central bank could always reflate a depressed economy. As an outlandish example, he said that if things got really desperate you could always print up more money and throw it out of helicopters.
That is, of course, not very practical, but the terms "helicopter drop" and "helicopter money" have entered the lexicon as meaning central bank efforts to bypass the financial system and inject money directly into the economy.
One way to do this would be for the federal government to enact a large temporary tax cut, and then have the Fed make up the lost revenue by printing new money or the electronic equivalent and giving it to the Treasury. Alternatively, the money could be given to state governments so as to allow for different politicians to try putting it to use in different ways.
In practice there are some questions as to whether it would actually be legal for the Fed to do these things. But it's certainly logistically possible, and if Congress wanted monetary policy to be conducted this way it could always change the law. While the Fed's unconventional monetary policies are frequently criticized on the theory that they are inflationary, few people on the Federal Reserve's central staff seem to believe this. Inflation concerns are present in a few of the regional banks — most notably the Dallas, Richmond, and Philadelphia Feds — but the main concern in Washington is something else.
Instead, Federal Reserve Governor Jeremy Stein who'll be stepping down in May has forcefully made the case that excessively aggressive quantitative easing undermines the stability of the financial system. QE, in other words, might lead financial institutions to take excessive risks and possibly lead to new banking crises.
This view is associated particularly with Stein, who's been its main official exponent. But according to minutes released from Fed monetary policy meetings, these stability concerns have been widely discussed by policymakers. Are these worries warranted? Empirical research presented by Gabriel Chodorow-Reich at the spring Brookings Papers on Economic Activity conference indicated that they are not , and that in fact QE may be making financial institutions safer.
Blogs from Scott Sumner and David Glasner are highly focused on monetary policy from a pro-stimulus perspective. From a very different viewpoint, Stephen Williamson's blog is also extremely interesting and focused on these issues. More general-purpose economic blogs such as Marginal Revolution or Brad DeLong's site also frequently discuss relevant issues, as does the Economist's Free Exchange. If you want to dive deeper, the question of central banking in the crisis has also been the subject of several excellent books.
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By choosing I Accept , you consent to our use of cookies and other tracking technologies. Reddit Pocket Flipboard Email. The Fed's main tactics were: Interest rate cuts Targeted assistance to ailing financial institutions Quantitative easing or Large-Scale Asset Purchases Forward guidance about interest rates Despite the Fed's efforts, unemployment remained quite elevated for years after the onset of the crisis.
Who is making all these decisions? Alongside the Board of Governors there are twelve regional Federal Reserve banks: Each of the 12 reserve banks is responsible for a particular geographic region, or district. What did the Fed do in the early stages of the crisis? Why can't interest rates go below zero? What did the Fed try once interest rates hit zero?
What is quantitative easing? During the crisis, it has instead shot up in several large irregular spurts associated with different rounds of QE: What makes it quantitative is that when the Fed does QE it specifies a dollar quantity of assets that it wants to buy.
Did all this QE create tons of inflation? But lately they've been holding lots of extra reserve money : This stockpiling of excess reserves may have happened in part because the Fed now pays interest on them. Why did the Fed start paying interest on excess reserves? What's forward guidance?
Has the Fed's strategy worked? It depends how you look at it and it depends on whom you ask. As a substantive matter, this chart from Josh Lerner at the Oregon Office of Economic Analysis makes the case for Team Fed: Compared to other countries that have experienced major financial crises, in other words, the United States has done well over the past several years.
Should we audit the Fed? What are the main criticisms of the Fed's approach to the crisis? What more could the Fed have done?
What's this about dropping money from helicopters? Why doesn't the Fed do more to stimulate the economy? Where can I read more about this? Monetary economics is the subject of very robust discussion.
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