What Are The Fed's Actions During The Financial Crisis

The Fed’s actions during the Financial Crisis of 2008
The Federal Reserve took various measures to stabilize and make sure that the situations in the financial markets improved. The measures limited the damage on the market from affecting the entire economy. Among the measures, the Federal Reserve provided liquidity. This included giving financial institutions secured short-term loans. The loans helped to bail out financial institutions from imminent collapse. The Federal Reserve also supported weak financial markets. By doing this, the Federal Reserve helped defective markets to remain functional. In doing this, the Federal Reserve also gave unyielding support to crucial financial institutions. These entailed advancing loans to rescue financial institutions whose collapse would damage the reputation of the financial system. The Federal Reserve’s monetary policy included taking into account various steps. The bank interchangeably contracted and expanded its balance
sheet. The processes increased or decreased the supply of credit as well as the monetary base. The following discourse focuses on the measures that the Federal authority takes in response to the financial uncertainty that characterized 2008. Changes in the monetary base directly affect the supply of money (Allen and David, 2007, p.
17). Through this action, the Fed affected the interest rates that financial institutions charged on loans. Using the liquidity effect, Fed increased the interest rates and in the process reduced the demand for money. The Federal Reserve applied both conventional and non-conventional monetary policies to regulate the supply and demand for money during the financial crisis. Loans advanced by the Federal Reserve to financial institutions during the crisis amounted to non-conventional monetary policies because Fed disbursed the loans under unusual circumstances. In pursuit of this, the Federal Reserve used the forward guidance. In this case, Fed introduced the measures to maintain rates on long-term interest rates at their minimum. The operation twist followed this first measure where the Federal Reserve bought most long-term securities while at the same it offering a similar quantity of short-term
securities. The purchase of long-term securities and sell of short-term securities balanced the supply of credit in the market. The Federal Reserve pursued three main policy actions from the onset of the financial crisis. The first was the 325-basis scale of reduction in total federal funds rate. This policy worked between the mid months of September 2007 and end of April 2008. In the second approach, the Federal Reserve used TAF to lend money to financial institutions. The third policy was the Lehman monetary policy. The Federal Reserve applied the three policies successively based on the direction the crisis the crisis took and its impact on the financial market and the entire economy.
The financial crisis brought uncertainty and increased credit risks. This resulted in the rise of premiums while the markets shrunk (Anderson and Hofmann, 2010, p. 33). The case was worse because financial institutions accepted mortgage securities as collaterals for loans issued before the crisis. Most of the mortgage securities were unknown to the financial institutions meaning that institutions had poor reference systems. Following on the same, the Federal Reserve used TAF to issue loans to deposit taking financial institutions but neutralized the effect of the same by regulating the supply of money and credit in the market as earlier explained. This was sterilized lending that is economically a non-conventional policy. The process controlled the amount of money in supply in addition to controlling the loans given by the Federal Reserve.

References Allen, Ford & David, Gale. Understanding Financial Crises. Oxford: Oxford University Press, 2007. Print.
Anderson, Michael & Barb, Hofmann. Gauging the Effectiveness of Central Bank Forward
Guidance. Cambridge University Press, 368-97. 2010. Print.