Question

The Fed's dual mandate is to promote maximum employment and keep prices stable (target inflation rate is 2%). Please first explain how the Fed has used its three monetary policy tools (required reserve ratio, discount rate and open market operations) since the great recession to stimulate the economy (you can use the charts in the below links)

Then, comment on the Fed's current monetary policy based on Powell's testimony.

Answer 1

After the occurrence of great recession, the Fed has applied expansionary monetary policy. As a part of it, Fed has reduced required reserve ratio to facilitate the quantitative easing. Though, Fed does not use required ratio frequently as a monetary policy tool. The Fed has kept federal fund rate to the lower level up to 0% and it has transmitted to reduce the discount rate as well. Further, FOMC has applied open market operations to buy treasury bonds to increase the money supply. It will help increase consumption and investment spending  to facilitate the increase in AD. It will increase the AS and jobs will be increased.

Though, it also increases the inflation due to rise in price level. As a result, in recent years, Fed has slowly and steadily increased the Federal fund rate by 25 basis point so that economic growth rate is regulated and inflation rate is kept at its target level of 2%.  But, Fed has always shown its commitment to support the economy until recently and FFR is increased only to maintain the price stability.