Traditionally, to conduct monetary policy and to expand the money supply, the Fed purchased either outright or

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Traditionally, to conduct monetary policy and to expand the money supply, the Fed purchased either outright or on temporary basis Treasury securities. When it purchased these securities for the public, it credited the reserve accounts in banks and the amount of these reserves in banks would, in part, determine the amount of money and credit in the economy. The Fed did not intervene directly in particular security or credit markets, instead leaving those decisions to be made by the private market.
After the financial crisis of 2008, the Fed sharply changed its policies. It greatly expanded its involvement in the economy both in size and scope. The first way to see this is to note that the Fed s total assets increased during 2008 from less than $1 trillion to over $2 trillion. The second way is to note the change in composition of its assets. Prior to the financial crisis, the Fed primarily held Treasury securities as its assets. In 2010 the Fed held over $1 trillion in mortgage backed securities. During the financial crisis, the Fed designed a wide variety of new programs to channel funds to particular credit markets.
The Fed s support of the mortgage market and other specific credit markets was designed to make these markets work more smoothly and prevent disruptions during the crisis. Critics of the Fed s policies suggest that through its support of specific markets, the Fed crossed a political threshold that may pose risks to its long-term independence. During 2009 the Fed did wind down its investments in many specific markets, but increased the size of its mortgage-backed securities. Through these financial holdings, the Fed is still playing a direct role in the housing market.

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Macroeconomics Principles Applications And Tools

ISBN: 9780134089034

7th Edition

Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez

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