ECON 319 Lecture Notes - Lecture 2: Federal Open Market Committee, Federal Funds Rate, United States Treasury Security

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2008-2009 dysfunction in credit market worsens. Fed: liquidity action (e. g. establishment of a number of emergency lending facility, creation/extension of currency swap agreements) Fomc: liquidity action (cutting discount rate, extending term loans to banks) first; then constantly lowered target for ffr until december 2008. Increase in unemployment (6% 09/2008 to 10% 10/2009) Thus: fomc turned to non-traditional policy approaches (issue: limited historical experience) One mechanism: portfolio balance channel: different classes of assets are not. Bank more accommodative policy(cid:524) = will lower investors" expectations for future e. g. fed purchasing mbs should raise prices and lower yields of those securities; declining yields + rising asset prices ease overall financial condition + stimulate economic activity. Other effects of large-scale asset purchases (lsaps): signalling effect (central path of ffr downward pressure on lt interest rates + increase household and business confidence. Fed initiated series of lasps + fomc announced program to purchase large number of agency mbs and agency debt.

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