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					       One of the actions which Federal Reserve has taken to combat the recession was to ease

monetary policy. Federal Open Market Committee continually decreased its target federal

funds rate until target rate was set at a range from 0 to 0.25%. This action was consistent with

the objective of having high and sustainable growth in the economy, as lower interest rates

stimulate various kinds of spending and increase aggregate demand. A drop in interest rates

will result in a lower exchange value of the dollar, because US-based assets would become less

attractive for investors and, consequently, demand for dollar would fall. This in turn will boost

U.S. exports by lowering the cost of U.S. goods and services in foreign markets and make

imported goods more expensive, which will encourage businesses and households to purchase

domestic goods instead. Lower interest rates would also make investment projects that were

only marginally profitable for companies more attractive with lower financing costs, leading to

an increase in business activity and job creation. Also, lower consumer loan rates will elicit

greater demand for consumer goods, such as cars and other relatively high priced goods. Lower

mortgage rates will make housing more affordable and lead to more home purchases. They will

also encourage mortgage refinancing, which will reduce ongoing housing costs and enable

households to purchase other goods.

       Another action of Federal Reserve was associated with its function as the lender of last

resort. The Federal Reserve provided large quantity of funds through its discount window to

corporations which Federal Reserve deemed solvent. Federal Reserve also made significant

capital injections into banking system by introducing projects such as Term Auction Facility

(TAF) and Term Securities Lending Facility (TSLF). These facilities provided financial institutions

with loans collateralized by Mortgage backed securities and other types of assets.
Through these steps Federal Reserve ensured that sound financial institutions will be able to

address their short term liquidity issues. In the process of doing so, however, the Fed

dramatically increased the quantity of money in the system. Fed’s balance sheet went from

around 869 billion in August 2007 to almost 2.3 trillion by the end of 2008. With so much

money in supply, there are significant concerns about keeping inflation at low and stable levels,

which is one of the primary objectives of the Federal Reserve.


Monetary policy and the economy. http://www.federalreserve.gov/pf/pdf/pf_2.pdf

Timeline of financial crisis. http://timeline.stlouisfed.org/index.cfm?p=timeline

Credit and liquidity programs and balance sheet.


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