Question

During the most recent recession, the Fed used some new and expanded tools. Can you find any articles on these new tools, such as quantitative easing? Was it considered a success?

Answer 1

Fed has dual objectives of increasing employment and stabilizing price level in economy. Fed has played active role in moderating effects of recession and leading to economic recovery. Open market operation and discount rate are traditional measures of Fed to influence economy. Open market operation is most frequently used tool of Federal Reserve. But over the period of time, Fed has invented few others non-traditional tools to make monetary policy more effective. Following these tools:

Quantitative easing: it was widely used by the Federal reserve. it led to fall in interest rate. Fed bought toxic securities of private corporate houses.

Further, Operation Twist, was new tool of Fed. Under this program, Fed bought long term securities and sold out short term ones, In this way, new portfolio was created. Financial system became less vulnerable.

Next, Forward guidance program was initiated by Fed, so that private businesses and corporate houses can easily predict possible actions of Fed. it infused element of certainty in economy. So private investment picked up.

Although, these measures are new, they produced significant impacts and led to recovery of US economy in short span. These non-traditional tools were successful.