The Great Recession lasted from December 2007 to June 2009, making it the longest downturn since World War II. The Great Recession was particularly painful in various ways, despite its short duration. From its peak in 2007Q4 to its bottom in 2009Q2, real gross domestic product (GDP) plummeted 4.3 percent, the greatest drop in the postwar era (based on data as of October 2013). The unemployment rate grew from 5% in December 2007 to 9.5 percent in June 2009, before peaking at 10% in October 2009.
The financial repercussions of the Great Recession were also disproportionate: home prices plummeted 30% on average from their peak in mid-2006 to mid-2009, while the S&P 500 index dropped 57% from its peak in October 2007 to its trough in March 2009. The net worth of US individuals and charity organizations dropped from around $69 trillion in 2007 to around $55 trillion in 2009.
As the financial crisis and recession worsened, worldwide policies aimed at reviving economic growth were enacted. Like many other countries, the United States enacted economic stimulus measures that included a variety of government expenditures and tax cuts. The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 were two of these projects.
The Federal Reserve’s response to the financial crisis varied over time and included a variety of unconventional approaches. Initially, the Federal Reserve used “conventional” policy actions by lowering the federal funds rate from 5.25 percent in September 2007 to a range of 0-0.25 percent in December 2008, with the majority of the drop taking place between January and March 2008 and September and December 2008. The significant drop in those periods represented a significant downgrading in the economic outlook, as well as increasing downside risks to output and inflation (including the risk of deflation).
By December 2008, the federal funds rate had reached its effective lower bound, and the FOMC had begun to utilize its policy statement to provide future guidance for the rate. The phrasing mentioned keeping the rate at historically low levels “for some time” and later “for an extended period” (Board of Governors 2008). (Board of Governors 2009a). The goal of this guidance was to provide monetary stimulus through lowering the term structure of interest rates, raising inflation expectations (or lowering the likelihood of deflation), and lowering real interest rates. With the sluggish and shaky recovery from the Great Recession, the forward guidance was tightened by adding more explicit conditionality on specific economic variables such as inflation “low rates of resource utilization, stable inflation expectations, and tame inflation trends” (Board of Governors 2009b). Following that, in August 2011, the explicit calendar guidance of “At least through mid-2013, the federal funds rate will remain at exceptionally low levels,” followed by economic-threshold-based guidance for raising the funds rate from its zero lower bound, with the thresholds based on the unemployment rate and inflationary conditions (Board of Governors 2012). This forward guidance is an extension of the Federal Reserve’s conventional approach of influencing the funds rate’s current and future direction.
The Fed pursued two more types of policy in addition to forward guidance “During the Great Recession, unorthodox” policy initiatives were taken. Credit easing programs, as explored in more detail in “Federal Reserve Credit Programs During the Meltdown,” were one set of unorthodox policies that aimed to facilitate credit flows and lower credit costs.
The large scale asset purchase (LSAP) programs were another set of non-traditional policies. The asset purchases were done with the federal funds rate near zero to help lower longer-term public and private borrowing rates. The Federal Reserve said in November 2008 that it would buy US agency mortgage-backed securities (MBS) and debt issued by housing-related US government agencies (Fannie Mae, Freddie Mac, and the Federal Home Loan banks). 1 The asset selection was made in part to lower the cost and increase the availability of finance for home purchases. These purchases aided the housing market, which was at the heart of the crisis and recession, as well as improving broader financial conditions. The Fed initially planned to acquire up to $500 billion in agency MBS and $100 billion in agency debt, with the program being expanded in March 2009 and finished in 2010. The FOMC also announced a $300 billion program to buy longer-term Treasury securities in March 2009, which was completed in October 2009, just after the Great Recession ended, according to the National Bureau of Economic Research. The Federal Reserve purchased approximately $1.75 trillion of longer-term assets under these programs and their expansions (commonly known as QE1), with the size of the Federal Reserve’s balance sheet increasing by slightly less because some securities on the balance sheet were maturing at the same time.
However, real GDP is only a little over 4.5 percent above its prior peak as of this writing in 2013, and the jobless rate remains at 7.3 percent. With the federal funds rate at zero and the current recovery slow and sluggish, the Federal Reserve’s monetary policy plan has evolved in an attempt to stimulate the economy and meet its statutory mandate. The Fed has continued to change its communication policies and implement more LSAP programs since the end of the Great Recession, including a $600 billion Treasuries-only purchase program in 2010-11 (often known as QE2) and an outcome-based purchase program that began in September 2012. (in addition, there was a maturity extension program in 2011-12 where the Fed sold shorter-maturity Treasury securities and purchased longer-term Treasuries). Furthermore, the increasing attention on financial stability and regulatory reform, the economic consequences of the European sovereign debt crisis, and the restricted prospects for global growth in 2013 and 2014 reflect how the Great Recession’s fallout is still being felt today.
During the Great Recession, what was the monetary policy?
The Fed’s response to the crisisdramatically decreasing short-term interest rates and lowering long-term interest rates through quantitative easing while maintaining a 2% inflation targetaided the economy’s recovery. By early 2017, the unemployment rate has fallen below the long-term “normal” rate, according to experts. But, if the Fed had acted differently, could it have happened sooner?
One method to resolve that question, according to Eberly, is to simulate what might have happened under other circumstances.
So she and her colleagues built counterfactual scenarios by mathematically modeling how the unemployment rate responded to various components of monetary policy, such as short-term and longer-term interest rates, as well as inflation’s response to monetary policy, using historical data.
“That allows you to say, ‘Instead of the Fed doing what it actually did, suppose it did more or lessor assume it acted at a different time,'” argues Eberly. “After that, you run it through the model and get varied unemployment projections.”
During the 2008 recession, how was monetary policy implemented?
The Federal Reserve System, which is America’s central bank, is the primary governing body tasked with preventing recessions. It is also one of numerous institutions tasked with supervising banks and ensuring the financial system’s stability. As a result, beginning in 2008 and lasting for several years afterward, the Fed was on the front lines of addressing intertwined banking and real-economy problems.
The Fed has used a variety of instruments in its fight against the crisis, including classic monetary policy tactics as well as a variety of unconventional ones. It has received enormous political scrutiny and has been in the public glare like never before.
Despite the Fed’s efforts, unemployment remained high for several years after the crisis began. As a result, the central bank was accused of undue complacency as well as excessive activism.
What is the name of this monetary policy?
1. In the United States, the Federal Reserve Bank is in charge of monetary policy. The Federal Reserve (Fed) has a dual mandate, which is to promote maximum employment while keeping inflation under control. That implies the Fed is in charge of balancing economic growth and inflation.
During inflation, what monetary policy is used?
Monetary Policy Constraints During times of inflation, cutting spending is vital since it helps to slow down economic growth and, as a result, the pace of inflation.
During the Great Depression, what happened to the monetary base?
Bankruptcy Many banks (especially small banks) went insolvent as a result of the downturn in the economy. Because there was no deposit insurance at the time, many people withdrew their money from banks and held it as currency. Depositors were scared of bankruptcy, which resulted in a number of bank runs.
What two monetary policy instruments did the Fed acquire in the 1930s, and are both still in use today?
Between 1929 and 1933, nearly everyone agrees with Milton Friedman and Anna Schartz (1963) that the Federal Reserve’s monetary strategy was wrong. Open-market operations and the discount rate, at which the Fed enabled member banks to borrow (or discount bills to the Fed) to meet reserve requirements, were the Fed’s two main weapons for influencing the money supply at the time. The acquisition or sale of existing bonds was part of the open-market operations. In a panic, reductions in the discount rate and bond purchases might be employed to lower the likelihood of bank failures, and both led to increases in the money supply. If the Fed’s goal had been to prevent bank failures and unemployment in the US economy, the best method would have been to cut the discount rate and buy bonds.
The Federal Reserve, on the other hand, paid strict heed to the international gold standard, which was effectively a commitment that the Fed and US banks would pay an ounce of gold for every $20.67 in Federal Reserve notes. To stay on the gold standard, the Federal Reserve had to furnish sufficient US gold holdings to back up its guarantee. The Fed was anticipated to take efforts to make the currency more attractive if changes in the relative attractiveness of the dollar caused the US gold supply to fall below the right level. Raising the discount rate and selling (or at least decreasing purchases of) existing bonds were the customary tactics in reaction to gold outflows at the time.
What are some monetary policy examples?
The Federal Reserve of the United States has decided on monetary policies that have changed your business experience. They formulate policies and put them into action to either release more money into the economy or reign it in. Buying or selling government assets through open market operations, modifying the discount rate granted to member banks, or changing the reserve requirement (the amount of money banks must have on hand that isn’t already spoken for through loans) are all instances of monetary policy.
What is the RBI’s monetary policy?
The following are some of the direct and indirect instruments used to carry out monetary policy:
- Under the liquidity adjustment facility, the RBI lends banks quick money against government securities and other approved collaterals at a fixed interest rate known as the repo rate (LAF).
- Reverse Repo Rate: A set interest rate at which the RBI absorbs cash from banks on an immediate basis in exchange for qualifying government securities held by banks under the LAF.
- The Liquidity Adjustment Facility (LAF) includes auctions for overnight and term repo. The RBI has gradually raised the amount of liquidity infused through modified variable rate repo auctions with various tenors. Term repo’s goal is to help build the interbank term money market, which can create market-based standards for loan rates and deposits, and therefore improve monetary policy transmission. Variable interest rate reverse repo auctions are also available from the RBI, depending on market conditions.
- MSF (Marginal Standing Facility): A facility under which planned commercial banks can borrow additional capital from the RBI by dipping into their Statutory Liquidity Ratio (SLR) collection up to a certain limit and paying a penalty rate of interest. As a result, the banking system has a safety valve against unforeseen liquidity shocks.
- The MSF rate and the reverse repo rate manage the daily change in the weighted average call money rate corridor.
- The Bank Rate is the rate at which the Reserve Bank of India is willing to buy or sell bills of exchange or other commercial documents. Section 49 of the Reserve Bank of India Act, 1934, provides access to the bank rate. The rate is linked to the MSF rate and adjusts automatically as the MSF rate changes in tandem with the policy repo rate.
- CRR (Cash Reserve Ratio): The average day-to-day balance a bank is expected to maintain with the RBI as a percentage of its net demand and time liabilities (NDTL) as advised by the RBI in the Gazette of India from time to time.
- SLR (Statutory Liquidity Ratio): The percentage of NDTL that a bank must keep in secure and liquid assets like as government securities, cash, and gold. Variations in the SLR have a significant impact on the banking system’s ability to lend to the private sector.
- Open Market Operations (OMOs) are outright purchases and transactions of government securities for the purpose of injecting and absorbing long-term liquidity.
- The Market Stabilisation Scheme (MSS) was established in 2004 as a mechanism for monetary supervision. Excess liquidity of a longer duration resulting from big capital inflows is absorbed through the sale of short-dated government collaterals and treasury bills. The money is kept in a separate government account at the Reserve Bank of India.