![]() Let me make an important distinction here. This guidance was short term, specific to the task of when to tighten policy in this current cycle, and focused on specific tools. These conditions were, in effect, the FOMC's plan for starting the process of tightening policy. ![]() In September and December of 2020, the FOMC provided criteria or conditions in the meeting statement that would need to be met before the FOMC would consider raising interest rates and begin to reduce asset purchases, respectively. There are some other lessons, I think, from the experience of tightening monetary policy, a process which was put in motion by the guidance that the FOMC issued in 2020 about how long it would keep the federal funds rate at the effective lower bound and continue asset purchases. Perhaps the most straightforward takeaway for monetary policy is that in times of severe stress, lending facilities, along with sharp cuts to the federal funds rate and the introduction of large-scale asset purchases, are very effective in reviving the economy. Over the course of 2020, the Fed's liquidity and credit facilities saw reduced demand and most of the emergency programs were decommissioned around year end. Besides supporting smooth market functioning, asset purchases also aided in the transmission of monetary policy to broader financial conditions.įinancial markets stabilized relatively quickly. ![]() Asset purchases were undertaken in response to disruptions in financial markets, particularly in the normally stable U.S. 3 All these actions were taken to support liquidity in the financial system and keep credit flowing to households, businesses and state and local governments. Meanwhile, the Fed established numerous liquidity and credit market facilities. Over several weeks starting in early March 2020, the FOMC lowered the target range for the federal funds rate to the effective lower bound and began purchasing Treasuries and agency mortgage-backed securities (MBS). Let's start at the beginning, when the United States was faced with the economic shock from COVID-19. Because of that likelihood, it is especially useful to consider the lessons learned. 2 I hope we never have another two years like 20, but because of the low-interest-rate environment we now face, I believe that even in a typical recession there is a decent chance that we will be considering policy decisions in the future similar to those we made over the past two years. Structural changes in the economy have tended to lower interest rates and limit the room that the Federal Reserve will have to cut rates during a slowdown. But the first time for these actions was scarcely a decade ago, and there is good reason to think such a response may not be extraordinary anymore. It was only the second time that the Fed had taken such dramatic steps. We swiftly lowered the target range for the federal funds rate to close to zero-the effective lower bound-and made an open-ended commitment to purchasing securities. In addition to the Federal Reserve's emergency lending programs, the monetary policy actions taken during this time were deemed extraordinary.
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