Description
In times of a struggling economic situation, determine the key steps that the Federal Reserve should take to help stabilize the economy.
Explanation & Answer
The Federal Open Market Committee (FOMC) of the Federal Reserve System
(Fed) meets approximately every six weeks to decide on its use of the
two policy tools at its disposal: setting the federal funds rate and
engaging in open market operations. (Note: changing the reserve
requirement is a rarely used third tool). The federal funds rate is the
interest rate at which banks lend funds to other banks, using the
Federal Reserve as an intermediary. Open market operations consist of
buying and selling financial assets, changing the lending capacity of
financial institutions.
The Fed instituted an asset buy-back
program in 2008 in an effort to stimulate the economy (QE1). This
program has been renewed (QE2 and QE3) until October of 2014. In
addition, the FOMC has maintained the federal funds rate target at a
range of 0 to 1/4 percent since its December 16, 2008 meeting. The fed
funds rate has been kept at this historically low level because of the
low (or sometimes negative) growth rates of real GDP due to the
lingering effects of the recession.
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