The Fed’s actions during the Financial Crisis of 2008
The Federal Reserve took various measures to stabilize and make sure that the situations in the financial markets improved. The measures limited the damage on the market from affecting the entire economy. Among the measures, the Federal Reserve provided liquidity. This included giving financial institutions secured short-term loans. The loans helped to bail out financial institutions from imminent collapse. The Federal Reserve also supported weak financial markets. By doing this, the Federal Reserve helped defective markets to remain functional. In doing this, the Federal Reserve also gave unyielding support to crucial financial institutions. These entailed advancing loans to rescue financial institutions whose collapse would damage the reputation of the financial system. The Federal Reserve’s monetary policy included taking into account various steps. The bank interchangeably contracted and expanded its balance sheet. The processes increased or decreased the supply of credit as well as the monetary base. The following discourse focuses on the measures that the Federal authority takes in response to the financial uncertainty that characterized 2008. Changes in the monetary base directly affect the supply of money (Allen and David, 2007, p. 17). Through this action, the Fed affected the interest rates that financial institutions charged on loans. Using the liquidity effect, Fed increased the interest rates and in the process reduced the demand for money. The Federal Reserve applied both conventional and non-conventional monetary policies to regulate the supply and demand for money during the financial crisis. Loans advanced by the Federal Reserve to financial institutions during the crisis amounted to non-conventional monetary policies because Fed disbursed the loans under unusual circumstances. In pursuit of this, the Federal Reserve used the forward guidance. In this case, Fed introduced the measures to...
References: Allen, Ford & David, Gale. Understanding Financial Crises. Oxford: Oxford University Press, 2007. Print.
Anderson, Michael & Barb, Hofmann. Gauging the Effectiveness of Central Bank Forward
Guidance. Cambridge University Press, 368-97. 2010. Print.
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