The Fed's Expanding Playbook: Economists' Views
22 December 2008
By Dr. John Montgomery with former NERA economist Dr. Elaine Buckberg
In response to the credit crisis, the Federal Reserve and US government have so far provided commitments or funds totaling $3.2 trillion, or 23% of annual GDP in 2007, in the form of liquidity, guarantees, and asset purchases. Government and Fed funding commitments now exceed by nearly 50% the balance sheet of even the largest US bank. The Fed alone is supplying $2.4 trillion or 80% of that amount, including liquidity provision to depository institutions and primary dealers and the purchase of private sector companies' debt obligations.
Although interest rate cuts have been exhausted, the Fed's commitment to "use all available tools" makes clear that the Feb believes it has yet more ammunition and will use it as needed. With developments continuing at a rapid pace and a new administration preparing to take over, this paper discusses current and proposed Federal Reserve policies to combat the credit crisis, and the Fed's ever-expanding role.
