By adjusting the policy rate (the federal funds rate), the Fed alters financial conditions, which then influences the behavior of businesses and households. These changes impact a variety of decisions, including how much to consume, produce, and invest.
In December of 2008, after reducing interest rates over an ~18 month period, the Federal Reserve hit the zero bound. They decreased the federal funds rate to the 0 to 1/4 percent range where it currently sits. In response to the zero bound being hit, exotic, never before seen forms of stimulus were put into play.
When short-term rates could not be reduced any further, the Fed implemented additional measures to suppress longer-term rates, which have not hit the zero bound. Specifically, the two main approaches that have been used are quantitative easing (QE) and forward guidance. The implementation of these new forms of monetary policy have made it difficult to compare pre-recession monetary policy ... Log in or subscribe to continue reading.
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