The Fed responds to the terrorist attacks of September 11, 2001

When the Fed was founded, its primary purpose was to provide discounted loans to banks suffering from deposit withdrawals. Today, discount lending has become relatively less important in Fed operations. For example, the average weekly amount of discount lending in effect in 2001 through 9/11 was only $34 million. Still, discount loans remain an effective way for the Fed to make funds available to banks quickly in an emergency. Banks can use these funds to provide cash or loans to households and businesses. The day after the September 11, 2001 terrorist attacks in New York, Washington, D.C. and Pennsylvania, the Federal Reserve provided massive discounted loans to banks. Discount loans increased from $99 million on September 5 to $45.5 billion on September 12, or 500 times their normal level. In the end, households and businesses did not withdraw excessive amounts from their bank accounts after the attacks, and the volume of discount loans returned to normal levels very quickly. By September 19, discount loans had fallen to $2.6 billion, and by September 26, they had fallen to just $20 million. The Federal Reserve also relied on discount lending to protect the banking and financial systems from potential instability during the subprime mortgage crisis of 2007 and 2008. Although the modern Fed focuses on its inflation and economic objectives, which it implements through open market operations, it still retains its original purpose of dealing with possible financial panics. To d this, discount loans can be an effective tool. Source: Federal Reserve Board of Governors, Statistical Release H.4.1, various weekly editions. Question Some economists and members of Congress have argued that because of deposit insurance, bank runs and panics no longer occur, and the Federal Reserve no longer needs to act as a lender of last resort. Therefore, the Federal Reserve Act must be amended to eliminate the Federal Reserve's ability to make loans at a discount. Probably evaluate this argument. Response:

Objective: Work on lowering target inflation On February 1, 2006, Ben S. Bernanke was sworn in as Chairman of the Federal Reserve Board. Although Bernanke is a respected macroeconomist, he succeeded a chairman, Alan Greenspan, who was given high marks for his leadership of the Federal Reserve during a period (1987-2006) of prosperity and low inflation. In the months leading up to the end of Greenspan's term, much speculation surrounded how the Reserve Board would operate under its new chairman. Long before his appointment as chairman, Bernanke will need to get the Fed involved in inflation targeting. In a 2004 interview, Bernanke was asked if the Fed's previous commitment to price stability was not a de facto inflation targeting policy. Bernanke gave the following response. It is true that the Fed is already practicing something akin to de facto inflation targeting... My main suggestion is... give an explicit target... provide the public with a working definition of price stability in the form of a number or a numerical range for inflation. ...First, such a step would increase policy coherence...Second, there is now...evidence that anchored public expectations of inflation are highly beneficial not only for stabilizing inflation but also for reducing output volatility...Third, from the point of view of From a communications standpoint, the financial markets would be well served by learning about the Fed's...inflation target... Source: Interview with Ben S. Bernanke, The Region, Federal Reserve Bank of Minneapolis, June 2004; http://minneapolisfed.org/pubs/region/04-06/bernanke.cfm. In 2012, the Fed announced that it would target 2 percent inflation. What will be the purpose of setting a clean inflation target?

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