Question

Do you think the FED is doing a good job fighting against the current recession? Briefly discuss.

Answer 1

The 2008 financial crisis supercharged the recession that began about a year earlier, threatening to plunge the nation into another Great Depression. The Fed already was well underway in lowering its key short-term rate close to zero. But the economy remained in deep trouble.

So Fed officials tried a tactic pioneered by Japan’s central bank in the early 2000s: large-scale asset purchases known as quantitative easing.

The idea is simple, but controversial.

Purchasing government bonds and mortgage-backed securities tends to push down mortgage and other long-term interest rates. Mortgage rates are tied to the value of Treasury bonds, and the higher demand for mortgage-backed securities also helps push rates lower because the return on those securities doesn’t have to be as large to attract investors. Those falling rates encourage spending and investing over saving.

The move also increases the money supply because a central bank buys the bonds by electronically increasing the reserves it holds of the commercial bank from which the purchase was made. So, in effect, the Fed prints new money, which can be borrowed and spent.

Fed policymakers launched three separate rounds of quantitative easing, purchasing Treasury bonds and mortgage-backed securities, as the economy continued to recover slowly and unemployment remained high.

Federal Reserve quantitative easing bond purchases

• First round: $1.75 trillion, Nov. 2008-March 2010.
• Second round: $600 billion, Nov. 2010-June 2011.
• Third round: $1.64 trillion, Sept. 2012-Oct. 2014.

The effort “significantly lowered long-term interest rates which helped support the housing market and the broader economy,” said Mark Zandi, chief economist at Moody’s Analytics.

“I think it was a very positive step in support of economic growth,” he said.

An analysis by Zandi and Princeton economist Alan Blinder determined that the bond buying increased total U.S. economic output by 1.5 percentage points through the first quarter of 2015. And it provided the stimulus without the high inflation some experts warned would come from adding so much money into the economy.