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The Federal Reserve 1
THE FEDERAL RESERVES MONETARY POLICIES AFTER CRISIS
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Table of Contents
The FED'S Monetary Policies after Crisis…………………………………………. Error!
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Introduction……………………………………………………………………….. Error!
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Research Questions………………………………………………………………… Error!
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Research Objectives………………………………………………………… Error!
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Hypotheses ……………………………………………………………………..Error!
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Null hypothesis ………………………………………………………...........Error!
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Alternative hypothesis ………………………………………………………Error!
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Literature Review …………………………………………………………….Error!
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Brief summary of the literature …………………………………………….Error!
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Critique………………………………………………………………….. Error!
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Conclusion of the review………………………………………………….. Error!
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Methodology ………………………………………………………………Error!
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Economic models…………………………………………………………. Error!
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Predictions………………………………………………………………. Error!
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Assessment………………………………………………………………… Error!
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Data Collection……………………………………………………………. Error!
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Survey…………………………………………………………………….. Error!
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Secondary data ………………………………………………………Error!
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Data Analysis …………………………………………………………….Error!
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Skewness …………………………………………………………….Error!
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Testing normality ……………………………………………………Error!
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Trends established ……………………………………………………..Error!
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Conclusion ……………………………………………………………Error!
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The FED'S Monetary Policies after Crisis
Introduction
The global financial crisis of 2007 is considered by many economists to have been by far
the worst economic crisis if not a disaster since the great depression of the 1930s. The recession
which has been blamed for the massive resultant misery for the laid-off workers was a global
phenomenon that significantly affected the developed countries leading to crashes in the major
financial markets. The instability this situation created for nations mainly due to the near
collapse of social security institutions which had invested their money in the capital markets
necessitated that they respond in creative ways to alleviate the suffering. Their chief instrument
of attack of the problem naturally fell to the central banks around the world which are mandated
to regulate a country's fiscal environment.
In the United States, the Federal Reserve System commonly known as the FED was
formed in the year 1913 under the administration of Woodrow Wilson to manage inflation and
keep unemployment at bay. It does this by regulating what is known as the base lending rate, a
rate of interest that is charged on all banks that borrow from the FED and in turn lend it to the
general public and companies with interest. In this way, the FED is the only institution that is
allowed to print money in the United States, and thus it controls the liquidity in the markets of
the United States. The US is the world's largest economy, and also the dollar is recognized as
the international currency of exchange, because of this fact, any policy or decision affecting the
dollar has repercussions to the entire world economy.
Rudebusch outlines the process that is pursued by the Federal Reserve System for the
stabilization of the micro and macro environment in an economic system. He dissects the
The Federal Reserve 6
possible causes of the crisis and admits that it is nearly impossible to assign blame to any one of
these causes. However, the author agrees to the conventional wisdom that the highly
unsustainable and volatile housing bubble had a lot of bearing on the outbreak of the crash of
2008. The Congress, on the other hand, has delegated responsibility on monetary policy to the
national central bank, the Federal Reserve, popularly known as the fed, but has maintained
oversight responsibility to ensure that the Fed acts in conjunction to its statutory mandates of
stable prices, maximum employment as well as moderate long-term interest rates. As a way of
providing price stability, the Fed has already set up a long-term goal of about two percentage
inflation. The Fed's monetary control policy originates from its ability to alter the supply of
money as well as credit conditions abroad. Usually, the Fed conducts the policy on fiscal by
setting up federal funds rate targets, that is, the rate at which banks lend as well as borrow
reserves on an overnight basis. It, therefore, strives to meet its objectives through open market
operations which are viewed as traditional financial transactions involving the United States of
America
As time went by the function of the Federal Reserve System has evolved to include the
management of seasonal fluctuations in liquidity thereby addressing problems of bank panics and
acting as the regulatory body for the banking industries. Since it was set up, it has gone through
some crises and cycles of boom and burst in the economy. Moreover, apart from internal control
of credit, it also has a transactions account with the exchequer and oversees the financial deals
made between the United States government and foreign governments.
In the summer of 2007, the financial crisis unexpectedly hit Wall Street due to the
bursting of the housing bubble that had grown to unsustainable levels. The Federal Reserve
responded aggressively to the financial crisis, including the implementation of some programs
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designed to support the liquidity and stability of financial institutions and foster improved
conditions in financial markets to improve low performance. These frantically enacted programs
led to significant changes to the Federal Reserve's balance sheet by piling on more debt.
Moreover, its decision to lower the interest rates to encourage the uptake of loans and increased
public and private spending was responsible for much of the recovery after the recession. The
FED, therefore, was able to raise the money supply at cheap rates vastly and is attributed for the
short time that the crisis lasted. This approach is just one example of the policies taken by the
reserve system after the financial crash.
While these crisis-related special programs have expired or been closed, the Federal
Reserve continues to take actions to fulfill its statutory objectives for monetary policy: maximum
employment and price stability which were its intended initially objectives for its founding Have
been partially attained in the aftermath of the crisis and this can be attributed to the FED as well
as the increased demand and steady growth in the world's biggest market, China. A lot of
literature has been written on the responses taken by the FED and also about how effective these
responses have been and therefore, it is a topic that has received much analysis.
For example, Ben Bernanke's book "The Federal Reserve and The Financial Crisis" is
perhaps the best case study book written on the subject. In the book, the author outlines the
formation of the Federal Reserve System and the role it played in past financial crashes including
the great depression and the post-world war two economic eras. This sets an excellent
background for the discussion of the subsequent events in the financial markets and the 2007-
2008 crises with its global nature put in consideration. Having served as the 14th chairman of the
Federal Reserve System, Ben Bernanke is in a privileged position of observing the operations of
the FED and thus gives a firsthand account of the policies undertaken by the system. Many other
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writings on the topic have been published owing to the financial crash happening in the
information age thereby stands an excellent ground to be well distributed.
This thesis examines the causes of the the2007-2008 recession, the response of the
Federal Reserve System to the crisis, including the short term and long term measures taken and
finally its impact on the American economy in the short time. This scope is small enough to
analyze and outline the required information exhaustively but long enough to be relevant to the
future studies of the same topic. It is the hopes of the author, therefore; that it will be helpful to
the future researchers on the subject and it will be objective enough to be used as a noteworthy
reference as well as knowledge extension in the field of economics.
As stated earlier, there already exists a wide range of research regarding the events of the
recession of the 2008 and its aftermath. Most of the available literature delves on the causes and
the effects of the recession including how it was finally mitigated. However, the information
available may not sufficiently focus on the Federal Reserve System and thus this thesis attempts
to the author's best abilities to focus exclusively on this particular part. Moreover, in as few
words as possible so as not to be convoluted to the future readers if any, the thesis gives a
comprehensive analysis using conventional and proven research methods that as the author
explains, the reality of the system put in place to protect the stability of the American economy.
The advantages of the current level of research on the topic include the fact that there is
reliable information to explain the recession as it transpired. The example stated earlier in the
book written by the former chairman of the Fed; Ben Bernanke is a reasonable basis for any
economist seeking to understand the workings of the Federal Reserve System from an insider.
Moreover, it forms the backbone of my research on the matter and for this reason; it will be an
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excellent source of information for the thesis including secondary data that will be extensively
analyzed in the methodology of the argument. The disadvantages of the current situation in the
research are the fact that most literature does not focus on the FED as a significant factor in the
financial crisis. Moreover, most of the literature is quick in pointing an accusatory finger to the
FED for not noticing the instability and unsustainability of the housing market as at that point.
This point appears to be valid putting in mind the many cases of unethical practices that were
ongoing in the financial sector and the FED's role as the regulator of this activity. However, the
causes of the crash can be attributed to many factors and not just the housing market bubble and
for this reason may have been out of control of any institution in the nation.
The housing bubble bursting caused an onset of the financial crisis that had adverse
effects on both Depository institutions as well as other sectors of the economic area which was
associated with the finance housing sector. As the misconduct rates increased as per the record
numbers on home mortgages, financial firms were left exposed to the market consisting of
mortgages which in turn suffered capital losses as well as the loss in liquidity access. The
adverse nature of these happenings was soon visible as other types of credits and loans which
were affected. This, with time, spread over into the broader economy, as the lack of confidence
soon hurt both aggregates as well as the demand production. In December 2007, the economy
entered a recession. As the housing slump's spillover effects to the financial system, as well as its
international scope, became apparent, the Fed responded by reducing the federal fund's target
and the discount rate. From the start of September 18, 2007, and ending on December 16, 2008,
the federal fund's goal was reduced from 5.25% to a range between 0% and 0.25%, where it
remained until December 2015. Economists have referred to this as the zero lower bound to
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indicate that at one point the rates of the federal funds was lowered to zero level, conventional
open market operations cannot be used to provide further stimulus.
The research is undertaken and outlined in this thesis eventually promises to be of great
importance to researchers and students of economics. This thesis will play a role in providing
and publicizing guidance and shaping the way economists and the general educated public views
the uncertainty felt in the financial industry and the mode of action most demonstrated by the
Federal Reserve System. Moreover, it is intended to provide financial literacy on the apparent
instability of any economic system by outlining academic insights on the recession and how it
was managed in the end.
Research Questions
What responses were obtained from the Federal Reserve System to the
financial meltdown of 2007/2008?
Were these responses responsible for the eventual resuscitation of the
economy and can any one of them be attributed with the most significant impact?
Are the survey respondents aware of the response of the Fed to the crisis
and what are their views on the matter?
Research Objectives
To objectively identify the best tools or research methods to be used in
financial markets and economics research
To outline provable evidence of the effectiveness of the FED's response
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To promote research in economics and the advancement of the knowledge
on the functioning of the financial market
To present the research information in a form that can be easily
understood and contribute new knowledge to the field of economics.
Hypotheses
Null hypothesis
The federal response to the crisis had no significant impact on the recovery of the
American economy.
Alternative hypothesis
The Federal Reserve System response to the crisis has a significant impact on the
recovery of the American economy
Literature Review
As stated earlier, there have been many materials written on the subject of the 2008
financial crash that brought the world's capital markets to heel and shrunk many of the developed
economies. For the most part, a lot of these literature deals with the causes and consequences of
the crash. In this thesis, the chosen secondary sources that will provide the bulk of information in
conjunction with other material include a wide range of books on the topic. Moreover, there are
also some primary sources that have been selected as well which will be an excellent source of
firsthand information that will be treated with economic theories and formula. This will help in
ensuring that the objectives of this thesis to provide a new perspective that is helpful to both
students and the public in advancing knowledge is attained.
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Summary of the literature
Economist Glenn Rudebusch in his analysis after the crisis tries to explore the causes of
the financial crisis to create the perspective for the explanation he has for the 2009 market crash.
In the book, "The Fed's monetary policy response to the current crisis," Glenn emphasizes that
the Federal Reserve system has been provide3d with a variety of tools which when carefully and
smartly used play a significant role in the management of economic instability. He lists the tools
as including the interest rate that has a direct influent influence on the bank's lending rate and
consequently affects the credit availability in the market. In this regard, the Federal Reserve
System has resorted to unconventional methods of managing imbalances and bursts in the market
that lowers the uptake of credit facilities. It mentions that the Fed dropped the interest rate to
nearly zero percent as one of the unconventional ways in which the institution resorted to assure
liquidity and preservation of people's jobs. This book is mostly objective in its analysis and
avoids the conspiracy theory orientations of many materials produced during the period it was
written.
Rudebusch outlines the process that is pursued by the Federal Reserve System for the
stabilization of the micro and macro environment in an economic system. He dissects the
possible causes of the crisis and admits that it is nearly impossible to assign blame to any one of
these causes. However, the author agrees to the conventional wisdom that the highly
unsustainable and volatile housing bubble had a lot of bearing on the outbreak of the crash of
2008. The Congress, on the other hand, has delegated responsibility on monetary policy to the
national central bank, the Federal Reserve, popularly known as the fed, but has maintained
The Federal Reserve 13
oversight responsibility to ensure that the Fed acts in conjunction to its statutory mandates of
stable prices, maximum employment as well as moderate long-term interest rates. As a way of
providing price stability, the Fed has already set up a long-term goal of about 2% inflation. The
Fed's monetary control policy originates from its ability to alter the supply of money as well as
credit conditions abroad. Usually, the Fed conducts the policy on fiscal by setting up federal
funds rate targets, that is, the rate at which banks lend as well as borrow reserves on an overnight
basis. It, therefore, strives to meet its objectives through open market operations which are
viewed as traditional financial transactions involving the United States of America. As at the
beginning of September 2007, the federal funds were reduced to a range between zero and zero
point two five percent from five point two five percent. Historically, rates were kept rather too
low for relatively a long time to help to counter the effects as well as post effects of the financial
crisis. The good news is that from December 2015, interest rates have been raised by the Feds
and this action is expected to continue increasing for a long time.
The Fed has always influenced the interest rates as a measure to help in controlling
interest sensitive spending, for example, household spending on consumer durables, business
spending on plant and equipment, as well as residential investments. In addition to these,
whenever interest rates differ between countries, capital flows arises thereby affecting the
exchange rates between the dollar and the foreign currencies, which will, in turn, affect the
spending on exports as well as imports. Using this technique, these post-financial crisis policies,
therefore, are capable of being utilized in stimulating as well as slowing down the aggregate
expenditure on a short-term basis but in the long term affects inflation. A slow, as well as stable
inflation rate, normally promotes transparency of price, therefore, sounding economic decisions.
The Fed initially tried to engage stimulus by germy buying of Treasury as well as mortgage
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subsidized securities while their target at the zero lower bound. This practice was later on as well
as today referred to as Quantitative Easing (QE). Quantitative easing was done majorly between
the year 2009 and 2014, about three rounds. The third round of the Quantitative Easing ended in
the year 2014, October when the Federal Reserve's balance sheet was at around four point five
trillion dollars, five times that which existed before the crisis.
The economic crisis affected different sectors of the country and required appropriate
measures to curb the challenges and establish productiveness in the economy. Thus, the Federal
Reserve System was a significant policy after the crisis since it ensured that the remedies persist
for a longer time. According to Svensson (2011), the differences between the monetary policy as
well as stability policy have notable differences. Both are, however, interrelated and were
encompassed in the strategic moves to foster economic stability after the crisis. Notably, the
financial stability policy and the monetary policy have applications in different situations in the
country that are determined a critical analysis of the elements that are present in the instruments
that enhance financial stability. The criteria that were used to develop these policies considered
numerous factors and thus offered credible solutions. Svensson asserts that when setting up a
superior money related strength arrangement, it is imperative to understand that fiscal policy is
unmistakable and not the same as the stability policy. The two provisions have diverse goals and
unique and reasonable instruments. Besides, the duty regarding money related strategy and
control of the funds related strategy instruments rest with the national bank. However, the
responsibility for the monetary policy and control of the budgetary solidness instruments are in
many nations shared by a few experts.
It is vital to recognize the essential elements that are incorporated in the implementation
of the Federal Reserve systems and maintain a strategic distance from reasonable and down to
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earth disarray between the two arrangements. Problems may arise in the implementation process
that is caused by the Perplexity dangers prompting a weaker result for the two approaches and
makes it harder to hold the policymakers responsible. Notably, the challenges may bring about
the difficulty in obtaining accountability that may heighten the chances of a repeat of the
problems that occurred during the crisis. Therefore, adequate measures were derived from the
Federal Reserve System to control the economy especially in the dimension of obtaining
remedies for the crisis. Endeavoring to utilize money related arrangement to accomplish
budgetary dependability prompts poorer results for the finances that linked directly to the
provision and is an ineffectual approach to achieve and keep up monetary reliability. This
assertion has a critical implication on the national outlook regarding the 2008 crisis. The federal
government and the states had a role in the policy implementation and the results obtained are
attributed to the economic state in the subsequent years. The procedures were done
notwithstanding the way that money-related solidness arrangement and fiscal approach are
particular furthermore; extraordinary does not imply that there is no collaboration between them.
This communication should be considered.
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Critique
The Fed has been criticized due to the idea of pure fiat currency, a currency that is made
up by the central bank and not backed by any precious metal such as gold and silver. Many
people share in this school of thought including Honorable Ryan Paul, a former presidential
candidate representative who has always insisted that the United States should end the Fed and
return the United States dollars to the gold standards. Representative Ryan Paul also believes that
the United States dollar should be backed by broad baskets of commodities unlike a particular
metal such as gold. Generally, Fred's conduct critics during the crisis can be divided into two
camps, that is, those who complain the Fed has not offered much during its operational days as
expected as well as those who complain of its excessively inflationary unconventional monetary
policies. The inflation critique has been backed up by the congress people who have made their
intention of changing the Fed's mandate to a single-minded focus to ensure the stability of prices
rather than its dual order on unemployment and inflation making it the most prominent critique.
This has been the case although this criticism is not understandable since inflation has been
unusually low since the implementation of the Feds monetary policies. The reviews on inflation
and unemployment argue that the Fed should be engaged on severe, more aggressive actions to
stimulate the economy. The Fed has several possible options of stimulative money policies at
their disposal and therefore should adopt these policies to enhance its effectiveness as well as
acceptability within the United States of America as well as the whole world. One option is the
adoption of a more quantitative easing. This is a straightforward adjustment. The underlying
logic is usually elementary since the Fed can decide to do more and more quantitative easing if
they are confident that quantitative easing boosts demand if inflation is low and unemployment
high.
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Another option that they can utilize is altogether abandoning the present inflation
targeting regime in favor of the Nominal GDP. Standard GDP is the country's total economic
output volume before making any adjustments for inflation. Using this school of thought, the Fed
can reason that there is standard nominal spending that it would love to view as it happens and is
indifferent if it takes the form of merely higher prices or rather more real growth. The idea is that
this action will ensure that people as well as businesses remove their money out of ultra-safe debt
given by the government as well as cash and employ them in real investments. If the Normal
GDP target is valid, then either the economy will experience a lot of inflation in the next couple
of years or else the economy will proliferate over the anticipated duration of years, during which
individuals will take advantage of the opportunity and invest in it. This approach has been
applauded by prominent individuals, for example, academic monetary economist Michael
Woodford, Christina Romer, former Obama's economic advisor as well as Jan Hatzius, the chief
economist of Sachs Goldman. The Fred is also criticized by creating new money and placing
them directly in the hands of governments or individuals instead of the banking system. Before
becoming the Federal Reserve chair and before the economic crisis, Ben Bernanke analyzed the
possibility that at zero bounds, there was little or rather nothing by the Japan banks. One way of
practicing this is when the federal government fiat currency enacts to ensure a substantial tax cut
as well as to ensure that the Fed make up the lost revenue by printing new money. The money
can also be given to the state government to allow different politicians to apply it to better use in
a variety of ways.
The roles of the central bank in the regulation of money circulation in the country are also
a major issue of consideration that appeared in the period after the crisis. The central bank's
strategy usually aims at controlling the economy through the regulations critical financial aspects
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other than the physical flow of money in a country. Therefore, the governments and central
banks usually collaborate in setting up the most significant policies especially in the event of
financial challenges. Physical control has been proven to have numerous disadvantages than the
other measures that include the control of interest rates that apply in the inter-bank lending
processes. The advent of electronic money systems and that of the modern financial instruments
is a significant factor that facilitated the shift from the basic monetary controls. The conventional
measures have been proven to be unpredictable and easily affected by the shifts in preferences.
The systems of lending have been revolutionized in the recent trends, and the Federal Reserve in
the country acknowledged this change in its implementation.
Federal Reserve policy preferred controlling the interest rates over the control of bills in
circulation in the country through the enactment of policies that enhanced the implementation of
these decisions. The policy focused on the levels of lending and saving that are crucial in the
economy. The policymakers argued that a change in the interest rates affect numerous
stakeholders in a way that can cause positive impacts on the entire economy. Also, the Federal
Reserve monetary policy also offered another approach towards gaining solutions to the
problems in the crisis. This strategy focused on three areas that were deemed to be essential to
the economy of the state. Firstly, the policy sought to rationalize the prices in the country. Price
stability has a significant impact on the economy since both inflation and deflation of prices have
adverse consequences on its growth. For instance, inflation reduces the value of savings that can
have negative implications for the economic growth and also creates a difficulty in the making of
economic decisions. Deflation, on the other hand, leads to postponement of investments and
purchases that threaten to cause a slowdown in the economy of the country.
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Therefore, the control on prices in the country has numerous benefits that include the
increase in employment rates. Furthermore, the adverse impacts of deflation and inflation are
averted, and the confidence of investors is boosted in their ventures within the nation. The
subsequent increase in the investments is a significant boost to the economic standards of the
country. The second element that was encompassed in the Federal Reserve monetary policy was
to establish a long-time moderation of the interest rates in the nation. The economic implications
of this measure are evident since the banking sector can be boosted and also control the money
circulation exercised effectively. The last element of the Federal Reserve monetary policy was an
enhancement of maximum employment that was aimed at revolutionizing the economy through
the earnings of the workforce.
The conclusion of the review
From all indications, the Fred is not supported by all the Americans who believe
otherwise. Many people criticize their techniques, that is, their monetary policies. Although these
unfortunate occurrences occur, it is important to note that inflation is only presenting a few
regional banks.
Methodology
Economics and related topics is an exciting field of study because it touches on activities
related to the livelihood and socio-cultural aspects of human beings. This topic requires the
approach of an open mind and careful consideration of the data presented for the study.
Moreover, the methods of data collection express a particular zeal to find information that
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touches on the people's views on a particular subject matter. The methods of data collection to be
used in the study include the use of interviews, observations, questionnaires and the most
common method documentary analysis.
The philosophical underpinnings of these methods derive from the fact that the topic of
discussion deals with human interactions with the environment and their acquisition of
livelihood. For instance, interviews are a great way of interacting and recording people's views
and opinions on how they feel about the various issues affecting them. During the research, a
semi-structured interview format was used to get as much information from the informants that
are not overly ambiguous or too narrow. This method has its limitation which includes being
expensive regarding time and resources required to interview a large number of people.
Observation method was also used primarily for when the researcher wants to know how people
behave in certain situations. In this method, a significant part of the quantitative and qualitative
analysis can be derived, and it is an example of a primary source of information. However, it is
quite a precarious method of obtaining information because in many cases, the consent of those
being observed must be obtained for it to be legal.
The other method which could be applied in the research for the thesis includes
questionnaires that were mostly open-ended. Experts in the field of economics and even lay
people were presented with questionnaires to gauge their view on the post-economic crisis
environment and were presented with the opportunity to give their opinions regarding the
response of the Federal Reserve System. Questionnaires were chosen because they provide
information that is standardized and therefore, comparable to many people. However, there are
some disadvantages that include the inability to get the level of qualitative detail in the responses
as compared to the use of interviews. Finally, most of the information making the bulk of the
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research has been derived from credible secondary sources written by experts on the subject.
Some of the experts have served on the board of directors of the Federal Reserve System and are
therefore authorities on the subject.
Economic models
This term refers to a set of constructs which represent economic processes by creating
relationships between different variables. There are various economic models by which the data
analysis of this study can be done as it will later be seen. These models are used to communicate
current and past economic information on the prevailing conditions including the causes and the
effects of economic crises. Mathematical techniques are used to predict economic activities in
which conclusions are arrived at based on educated assumptions. Moreover, they can be used to
create justification for the economic policies pursued by a nation or in this case a central bank,
the Federal Reserve System. Some of the economic models applied in this study include the
Classical Economic Model, Deterministic, qualitative and quantitative models.
Classical Economic Model
This model takes into consideration the law of demand and supply which are represented
in the most prolific model of all, the classical model. The act of demand and supply is perhaps
the most applied in capitalist countries such as the United States of America. The law of demand
states that as long as all other factors remain constant, the need for a certain quantity of goods
will increase when the price is reduced. The law of supply states that as long as all other factors
remain unchanged, a price increase will cause a reduction in the quantity demanded of a
particular good. In the context of the actions that can be undertaken by the Federal Reserve, the
institution controls inflation by varying the base lending rate which controls the demand of credit
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by financial and commercial firms which in turn influences their placement of orders for goods
and services form other firms.in this way, the economic activities in the nation is regulated in
such a way that the economy can be stimulated to overcome the economic downturn.
The above graph illustrates this phenomenon of the effect of demand and supply on the
quantity of a specific good in a perfect market. It can be observed that as the prices reduce from
$4 to $3, the amount of product demanded changes from 18 to 28. Moreover, as the price of the
commodity increases from $1 to $5, the quantity the person supplying the good is willing to offer
the market changes from 10 to 60. From the graph, one can quickly note the equilibrium price
and associated quantity is reached when the supplied amount of goods and the demanded one is
equal.
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Deterministic models
These can be further divided into stochastic and non-stochastic models which are
classified based on the variables involved in the analysis. Stochastic modeling bases its
calculations on one or more random variables to estimate the possible outcomes within a forecast
to predict the conditions that may occur in different systems. This model is used in the
presentation of data, prediction of outcomes and randomness in the collection of the continuous
or discrete data. It is stated as a deterministic modeling technique in which there is only one
solution to a presented problem or a set of specific values. Stochastic modeling can be equated to
the addition of variables to a complicated math equation to examine its effect on the math
problem's solution. The procedure is further repeated to give an allowable value of possible
solutions in different ways during the calculation process.
Qualitative models
This model bases its calculation on unquantifiable data such as opinions in interviews,
industry cycles, research strengths and relations of labor in industry. It sharply differs from
quantitative because of the latter deals with numbers which are easily written in reports, tables,
and charts. Therefore, qualitative analysis deals with intangible data concerns thereby involving
a lot of opinions in the processing and the final presentation of the information. This information
cannot be computed on a computer unlike the numbers engaged in quantitative analysis and the
associated models. This model put people at the center of the investigation because of its
inability to apply computerization principles. Moreover, it entails answering opinion questions
whose impact is intangible but equally as important as that of quantitative analysis.
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Qualitative economic models also indicate the change that has occurred over time and
their impact on the financial systems. The main point of qualitative analysis is to understand
issues and to provide a wholesome picture with which to make a valuable comparison with the
rest of the system. In this way, one can quickly make conclusions and predictions based on the
past behavior of economic policies. One of the most vital or rather significant things to consider
while using this model is the context within which the information was collected keeping in
mind that the same data may entail different meanings when exposed to different environments.
Quantitative models
As briefly stated earlier, these models mostly deal with numbers, figures and other kinds
of quantified data that can easily be put into a plot and its effect on an economic system
determined. For this reason, economists and the discipline of economics heavily borrow from the
field of mathematics for the computation of the many theories that have been proposed to explain
observed phenomena. Moreover, this is the model most applied in this thesis to explain the
collected data and further analyze it to make a model that can be easily applied to make the
material more widely applicable. The objective of this material is too relevant to all future
students of economics and as a useful way of explaining the role and reactions of the Federal
Reserve System to the financial crisis.
This economic analysis model makes computational economics, the discipline that
combines computer science, economics and the study of management. It is true to say that for
any serious study of the economic theory and all the accompanying sub-theories, one must
appreciably apply concepts of mathematics and data manipulation. On further examination, this
model is essential to the analysis of data presented in this material to the extent that it forms the
The Federal Reserve 25
core of the computation. Use of charts, tables and other means of data and information
presentation have been explored applied extensively to the satisfaction of any future analyst.
Predictions
It is worthy to note that any future expected outcomes and their predictions have to be
based on the events as they transpired. This thesis has been written in the era after the tackling of
the crisis and its future mitigation. Therefore, any predictions have to consider the fact that the
crisis was managed to a great extent by the institutions that were established to see to it that it
happens. The possible situations that can be anticipated include the successful participation of
the Federal Reserve System in the restoration of liquidity in the markets and the lowering the
unemployment rate. Moreover, the thesis is supposed to explore the possibility of taking the
model set up by the FED and discuss its real role in the financial markets of the United States
and the economy in general.
The predictions made in this section should take into consideration the research questions
earlier outlined and the hypotheses proposed for the study. This situation, therefore, means that it
is not necessary to evaluate the collected data, but preferably, it is prudent to make educated
guesses that can act as guides. The benefits of such an attempt cannot be overstated because they
can give useful insights into the working of the financial markets and the economy of the United
States in general. The possible benefits also include the fact that it enables a clearer picture of the
financial crisis of 2008 to be presented and thus the response of the FED to be put in perspective.
To be more precise, the possible benefits to be attained in the examination of the subject from a
speculative point will be a standard in the determination of the short-term effects of the
intervention of the Federal Reserve System.
The Federal Reserve 26
By following the questions earlier posed as the research queries, one can set insightful
predictions as to the possible information that would be derived from the data. This design,
therefore, will form the basis unto which to create the possible future happenings or the
conclusions that can be made from the information. The predicted response of the FED to the
financial meltdown of 2008-2009 was the lowering of the base lending rate for the period
following the crash. This can be seen as a prediction in the context that it is the natural or
convention means of encouraging consumption of more credit which promotes spending in the
economy thus stimulating growth. Economic spending and investing as opposed to saving
methods that businesses can make sales and therefore keep their workforces in employed thereby
avoiding large-scale joblessness.
Most economists agree that the lowering of the Federal lending rate in addition to the
government stimulus program was mostly responsible for the bounce back in the economy. The
bit about the stimulus package can be used as a reason for the ineffective nature of purely relying
on the manipulation of bank interests. However, this would be wrong in that it is an attempt to
outright discredit the importance of having an institution like the Federal Reserve System whose
importance cannot be understated. The prediction for the third question would involve a range of
outcomes because different people have differing levels of awareness on the role of the federal
system and the tools with which it uses to control the elements of the national economy. For this
reason, there is an expected wide variation in the kinds of responses that are expected from the
general public, and some are expected not give a useful insight into the matter.
The Federal Reserve 27
Assessment
This section focuses on the evaluation of the methodologies as planned out in the study
and the subsequent ascertainment of their viability. The methods will be considered based on
how well they conform to science principles and consequently how reliable they are. In the
evaluation process, it is paramount to consider descriptive as well as analytic techniques that can
be applied to give a comprehensive picture of the chosen methodologies. It is precisely for this
reason that an evaluation can be considered accurate thereby minimizing chances of
unintentionally being erroneous in our assessment. The importance of research assessment and
evaluation cannot be understated as it becomes apparent in many of differing methodologies and
approaches.
From the listing of the methodologies and the discussion of their strengths and
limitations, it is useful to note that these factors will have to be put into consideration. The
chosen methodologies were well screened and deemed appropriate for this study. The decision to
include both qualitative and quantitative methods in the analysis was to provide a different
picture to any subsequent reader of the material. Also, it enhances the ability of the collected data
to be projected towards the future study of the subject of economics. Among the objectives of
this study, there was a need to identify the best tools of research to use in the financial and
economic areas of a nation. Working with this kind of research capability enables the researcher
to be at the cutting edge of discovery and further validates the research findings.
There is a significant need to work with the aim of finding a method that leads to
comparable findings to peer research and eliminate the possibility of it being viewed as an
outlier. However, this does not mean that the researcher should endeavor to produce information
The Federal Reserve 28
that is similar to what has already been written as doing so means that there would risk of
plagiarism and the new information being entirely irrelevant for academic purposes.
Furthermore, such an outcome would say that the objectives were not met and that the resulted
work is another run off the substandard mill research. Keeping this in mind, it would be prudent
for the researcher to ensure that their work proves to show a new picture of the brains that are
hungry for new perspectives. The other objective of this research was to outline the effectiveness
of the Federal Reserve System in the management of the 2008 financial markets crash and
whether this can be genuinely attributed to the institution.
For this objective to be met there is a need to have a robust technique, tool or method that
can objectively tie the improvement of economic conditions in the aftermath of the crisis. This
can be extremely tricky to pin down consideration the different explanation and the complex
system of the United States economy to merely attribute it to one institution. For this reason, it is
safe to say that whatever the findings of the research would be an even with the application of
the most precise analysis, the result would indicate that the recovery of the US and the world, in
general, was attributable to a wide range of factors.
Data Collection
For the success of this research, many data collection methods were used up to ensure
that the results obtained were accurate as well as valid. Data collection therefore the information
measuring as well as gathering process which enables one to answer relevant questions. Data
collection, therefore, is a component of research in all fields of study which include business,
humanities, and social sciences, physical as well as humanities. The purpose or goal of all data
The Federal Reserve 29
collection is to capture quality evidence that acts as quality evidence as well as enabling a right
analysis of the data provided and thereby leading to the formulation of credible and convincing
answers to the research questions. Some of data collection techniques used includes:
Interviews
We conducted interviews of several people including officials in the Fed and the normal
citizens to get their take on the Fed's monetary policy after crisis as well as other pressing issues
associated with the crisis. In-depth interviews were used which aimed at identifying the
participants' emotions, opinions, as well as feelings. The main advantage of this type of interview
is the fact it involve direct contact as well as personal contacts between the interviewers and the
interviewees. Most of the people cooperated during the interviews and the process therefore was
a success of the highest order. The following questions were applied during the interview to
ensure that information on the Fed was finally conducted to ensure that the interview was a
success and did not move outside the topics of discussions. We gave out a sample of responses
from one of our interviewers who answered all the questions as well as gave personal effects of
the Federal Reserves in his own financial life.
Question: What were some of the responses of the Federal Reserve System to the
financial meltdown of 2007/2008?
Interviewee: They employed drastic measures including the Quantitative Easing, as well
as the zero lower bound rates to ensure that the fiscal crisis did not have a very long effect on the
economy of the United States of America.
Question: Are you conversant with the Fred? Yes or no
The Federal Reserve 30
Interviewee: Of course yes. The Federal Reserve is a very important organ within the
United States of America. They serve very many mandates that were given to them by the
congress on its formation. They always strive to improve our economy as well as assist the
government to ensure that the money circulating within the country is enough.
Question: How would rate the Fed as per now?
Interviewee: A five star of course. They made the country stronger again after the fiscal
crisis and have helped many citizens in achieving their dream, for example, I have personally
benefited in their mortgage programs.
Question: Were these responses responsible for the eventual resuscitation of the economy
and can any one of them be attributed with the greatest impact?
Interviewee: Of course yes. Their response policies to the crisis were awesome and that is
the main reason why the country’s dollar is still as worthy as ever and is the most preferred
currency so far. The economy of the United States of America has also had one of the best
economies in the world and inflation has therefore been an issue of the past. I am actually proud
of this institution; it has performed beyond my expectations.
Question: Are the survey respondents aware of the response of the Fed to the crisis and
what are their views on the matter?
Interviewee: I am very aware of the fiscal crisis of the 2008 to 2009 as well as the
formation of the Federal Reserves which has helped from that point hence force to reduce the
possibility of another crisis.
The Federal Reserve 31
Question: Do you think Fred's monetary policies are justified? Do they help in any way
or are they destructive?
Interviewee: The Federal Reserves have successfully removed the harsh effects of the
2008/2009 fiscal crisis through peculiar policies that indicates their readiness to tackle any future
problems.
Some of these questions were given meant to receive direct yes or no responses. Our
team consisted of about twenty crew members who were distributed to ensure that the various
interviews were broken down into achievable parts which could then be relayed to ensure that
the interviewer understood all the questions as well as ensuring that enough data is recorded as
the interviewers gave their minds. The following table shows the responses given by those who
were interviewed. In total, the number of interviewed persons was about twenty five.
Question
Number of people who
answer.
No response or having
no answer to the question.
1
20
35
2
50
4
3
39
16
4
55
0
5
43
12
6
51
4
The Federal Reserve 32
The interview was therefore marked successful through the cooperation by all our
interviewees who were fifty-five in total.
Focus Groups
We have also divided the country into groups due to the large number that we were
dealing with according to their political affiliations, cultural backgrounds as well as religious
backgrounds. We were, therefore, able to obtain as much information from almost all states with
the primary target of reaching as many states as possible to ensure that we got every mind within
the United States to tell about the post-crisis happenings. They were asked to make comments on
the Fed and if they thought they had failed or uplifted the value of the dollar. They were also
asked to comment on the current state of the nation as well as to point out any concerns they had
regarding the same. The results collected were then recorded in the following table.
Group Focus
positive Comments on
Fed
Negative comments on
Fed
Metropolitan States
1,430,634
2,427,834
Non-Metropolitan
States
540,543
4,543,876
We also employed a surveying system in the process for those citizens who did not have
time to make comments. We simply passed out questions which were in their simplest forms and
gave multiple choices in most of them to ensure that most of the questions did not require any
serious analysis. For those who were unable to read and write, they were assisted by our team to
The Federal Reserve 33
ensure that our practice was a success. We gave out the following questions as well as involved
them in some conversations during our surveys.
1) Have the Fed made United States of America great?
(a) YES (b) NO
2) Would you wish for the congress to pass a bill to withdraw the Fed and
replace it with a more effective body?
(a) YES (b) NO
3) Were the responses of the Fed effective after the financial crisis?
(a) YES (b) NO
4) Do you think the Fed is a famous institution in the United States?
(a) YES (b) NO
5) If yes, why?
(a) For its good services (b) For its poor services (c) I do not know
6) Are the Fed’s monetary policies justified?
The Federal Reserve 34
(a) YES (b) NO
7) How would you rate this important institution as at now?
(a) Five stars (b) four stars (c) three stars (d) Two stars (e) One star (f)
Zero star
8) What would you recommend the Fed to do as a way of improving their
service delivery?
We collected our data in standard form and not necessarily through the means of neither
questionnaires nor interviews. This survey was aimed at establishing the state of the affairs as at
the present time in order to establish if the American citizens were thrilled about the services that
have been offered by the Fed or they needed adjustments to be done by the same body. We tried
to control all conditions as well as variables and therefore involved as many states as possible in
the whole country. We also employed online surveys to help reach a wider range or rather
population coverage. We were therefore able to get data from many sources as it was a very easy
survey aimed at providing the thought of the general public on the services that the Fed have
offered so far during their lifetime as an organization. Many institutions were involved as well as
many other financial dockets that were given priority since they were well conversant with the
state of the nation as at this moment. The surveys were then recorded on a very simple table to
The Federal Reserve 35
ensure that it was easily understood by all the team members as well as easy to analyze. The
table below:
Question
Yes
No
1
12, 165, 865
10,942, 543
2
187,635
190, 673
3
10,632,625
14, 453,725
4
947, 284
100,436.
5
(a) 745,535
(b) 954,
453
6
432,453
649,45
7
(c) 543,873
(d) 543,945
Due to the large audience that participated in the survey, we presented only the number of
people who answered the specific questions since some of the questions were left blank in the
survey. That is why the population varies since some chose not to answer the certain question
due to their reasons.
The Federal Reserve 36
Questionnaires
We also used the questionnaire method where we circulated written documents in most
schools and institutions, colleges, offices as well as public joints to ensure that everyone had
equal opportunity to present their thoughts on the post-financial crisis. Assistance was made to
those who were not able to write but had something to give to help with the research. A series of
questions, just like the ones which were presented earlier during surveys were given out to
citizens across the nation to give out their views on the post-crisis Fed's monetary policies to
establish if they had an idea on these issues as well as to get their take on the same. The data
collected was presented regarding a chart which specified the number of people who did not
know of the existence of the Fed as well as those who had and their take on the policies that were
established by this body. The chart below is a representation of the information obtained.
1
2
The Federal Reserve 37
The red colored part is representing the portion of people who had an idea on the
existence of the Fed whereas the blue colored part served the portion who did not have an
opinion on the existence of the same.
The following chart represented the portion of the population that had a favorable view of
the Fed as well as the other that had a negative perception of the Fed.
The red part represents the portion that of the population that have a negative perception
of the Fed whereas the blue portion serves the population that had a favorable impression of the
Fed. We also inquired about the effects of the Fed's monetary policies on the dollar and the
results were relatively the same and were presented in the chart below.
1
2
The Federal Reserve 38
Case studies and Observations
Case studies involve the observation of the dollar situation in the country as at the present
times as well as the inflation rate. We also observed the current strength of the dollar as
compared to the other foreign currencies across the world especially those of stronger financial
power as compared to the dollar including the Euro and the Yen. Observations were also made
on the GDP of the country as well as reports from the Fed regarding their achievements as at the
moment. Information was also obtained from financial analysts who were either interviewed or
studied through their take on the current state of the nation as well as the future expectations on
the trends.
1
2
The Federal Reserve 39
Secondary data
We utilized many works that had been done by other researchers on the same topic to
obtain a more unobstructed view of the current financial trends as well as analysis of the effects
of the Fed's policies. Daniel L. Thornton in his article The Federal Reserve's Response to the
Financial Crisis: What It Did and What It Should Have Done, elaborates on the actions that the
Fed took to expand as well as contract its balance sheet through its investing and lending
activities. The changes which were linked to the changes in the supply of money. Until the
1990s, the Fed was believed to control the federal rates by adjusting the number of credits in the
market funds. Daniel also insists that before Lehman, there were only two significant policies
that existed: The Fed's lending primarily through the TAF and The three twenty-five basis point
reduction in the federal funds rate target between September 2007 and end April 2008.
Immediately after Lehman made the announcement the primary credit borrowing, as well as TAF
lending exploded. The Fed also ceased sterilizing lending, which led to the shrinking of the Fed's
Treasury holdings. The Quantitative easing was also a significant quantity purchasing policy
which indicated long-term assets, as well as maintenance of a large portfolio of private debt and
government, indicated in this article by Daniel. The Fed introduced this policy to reduce long-
term yields, thereby increasing the adequacy of monetary policy. Daniel also points out that it
was confusing of the Fed to implement both the Quantitative easing as well as forward guidance
at the same time since their theoretical justifications conflicts.
The Fed's first LSAP occurred in the year 2008 when they purchased up to one hundred
billion dollars in agency debt as well as five billion dollars in MBS. This policy, according to
Daniel was reinforced in the FOMC statements dated in December 2008 as well as January 28th,
2009, when it was indicated that FOMC stood ready to increase its purchase of securities. He
The Federal Reserve 40
also noted that Quantitative easing one occurred when FOMC announced its intentions to
establish stronger support to mortgage lending as well as housing markets. This was an
expansion on its large-scale asset purchases program that involved additionally purchasing about
one point two trillion dollars of MBS, longer-term Treasuries, as well as, agency debt over the
next six months. The second, as well as the following program on Quantitative easing, was
implemented in 2010, the month of November when the FOMC made public its decision
purchase additional six hundred billion dollars of longer-term Treasury securities at the pace of
about seventy-five billion dollars per month.
Daniel believed that the FOMC's decision to increase the size of the Fed's balance sheet
to somewhat an unprecedented level in addition to maintaining it at those particular levels was
unnecessary and mostly, if not wholly, ineffective in its intended purpose of reducing real long-
term rates in addition to stimulating aggregate demand. Quantitative easing was therefore useless
because financial markets had already stabilized significantly according to Daniel's article. As a
result of these occurrences, Daniel insists on the fact that the first borrowing declined from its
peak of about one hundred and twelve billion dollars by the last week ending March 2009. The
month of December 2008, in the midst of the financial crisis as well as the Great Recession, the
Fed applied a strategy of lowering the federal funds rate to range between zero percent and zero
point two five percent. This according to Daniel was then the very first time when prices were
had gone that lower, to a point which later on came to known as the zero bound, which was the
lowest percentage to be realized at this point. As the recovery of the collapsed economy proved
to be unexpectedly weak, the Fed countered this by pushing back its timeframe and in the
process raising interest rates. Due to this, the economic restoration was in its 7th year which was
marked by many cases or rather instances of rapid unemployment rates which already were near
The Federal Reserve 41
the Fed's estimate of full employment when the prices began rising in around December 16th,
2015. This was a contrary to the past practices, for example, the initial two economic expansions
where the Fed initiated the raising of its rates within the first three years which followed
recession ending. Ever since the Fed has continually raised their rates slower than they had
intended initially or rather had initially planned through series of logical steps to incrementally
tighten monetary policy. In 2016 and three times in 2017 the Feds increased their rates each
time; by about zero point two five percentage points. The Fed has always tried to add stimulus to
the economy even though the monetary policy has proved to be less stimulative more than it was
at the zero lower bound as long as the federal rate has maintained its neutral rate.
The Federal Reserve has controlled the monetary base which is a portion of the money
supply which is made up of currency as well as bank reserves. These fiscal policies are defined
as actions undertaken by the Fed to influence the availability and cost of credit and money to
enhance the goals with which it is mandated by the Congress, maximum sustainable employment
as well as stable price levels. These fiscal policies had economic effects in the long run as well as
short run. The expansionary fiscal policy, in the short term, requires the reduction of interest
rates increases interest-sensitive spending. Interest confidential expenditures include substantial
investment including plant and equipment by firms, residential investment, for example, housing
construction, and consumer-durable expenditures, for example, appliances as well as
automobiles by households. Daniel goes further to discuss how depreciation in exchange rates
lead to the rise as well as fall of the exports and imports respectively and vise vasa as a measure.
Daniel also suggests that the Fed is supposed to raise rates of interests as well as the reverse
operation of the system. On critical analysis of United States of America economic history, it is
The Federal Reserve 42
clear that money, as well as credit induced demand expansions, can have a good influence on
United States Gross Domestic Product growth and total employment.
When the economy is perceived to be in its full employment, the increase in expenditure
is predictably possible to be removed through high inflation rates faster than otherwise. When
the financial power is way below full employment, inflation pressures are more likely to be
muted. This same history, however, also suggests that over the more extended run, a more rapid
rate of growth of money and credit is mostly exposed in a faster speed of rising with little, if any,
lasting effect on real Gross Domestic Product as well employment. Economists have two sides to
this strange behavior. First, they acknowledge the fact that, in the short run, many economies
have an elaborate system of contracts that make it almost impossible in the short term to
significantly adjust wages as well as prices in response to huge money as well as credit growth.
Secondly, it is known that expectations are very slow to improve, for one reason or another, and
therefore cannot be easily adapted to a longer-term one with significant monetary policy
changes. This sluggish adjustment therefore also adds to the toughness of wages and prices.
Because of this toughness, those credits as well as money that have grown can change in terms of
their aggregate demand and therefore can influence initial output as well as employment. Over
the long run, contracts are renegotiated as well as the adjustment of expectation leading to the
rise in prices as well as wages as a result of the change in the demand. A lot of change can
therefore be undone in the output or employment. It is consequently very prudent to conclude
that monetary policy does matter in the short run but fairly becomes neutral for Gross Domestic
Product growth as well as employment in the long term. Price adjustments are one of the
indicators of high inflation rates within the long run.
The Federal Reserve 43
Rapid inflations in the finals steps or somewhat stages, commonly known as
hyperinflation, do not experience the possibilities of rapid growth of money or credit enough to
alter the Gross Domestic Growth or employment. According to Daniel's article, before the
financial turmoil in 2007, it had been agreed by most economists that a stable business cycle
could be sustained through prudent as well as quick changes to interest rates via transparently
communicated and signaled open market operations. This school of thought proved to be a no
case during those periods of extreme financial instability, and therefore Fed took increasingly
unprecedented as well as unusual steps to restore this financial stability. With short run rates
constrained by the zero bound, the Fed has aimed at reducing the long run rates through large-
scale asset purchases, which were popularly referred to as quantitative easing.
According to Lars Svensson in his article, Monetary Policy after the Crisis has tried to
explain the initiators of the crisis as well as the measures that can be put in place to reduce
eventual outcomes. Svensson has brought on board general question of what the relation between
monetary policy and financial stability should be. For instance, the reasons for the objectives of
monetary policy should be expanded to include financial stability. Such suggestions give the
impression that monetary policy and financial security is the same thing whereas in the real sense
they are not the same thing since they are not the same although they are related. Lars stresses
the importance of conceptually distinguish financial stability policy from monetary policy as
well as avoid conceptual and practical confusion between the two or more systems. Uncertainty
arising from risks leads to a poorer outcome for both procedures and outlays it as a more
challenging to hold the policymakers accountable. Lars further reasons that when trying to use
monetary policy to achieve financial stability is likely to lead to poorer outcomes for monetary
policy and is acts as an ineffective way of making and maintaining financial stability.
The Federal Reserve 44
He further expounds on the different economic policies, for example, monetary policy,
fiscal policy, as well as labor market policy, which can be divided or instead distinguished
according to their objectives, the policy instruments that are viable for achieving the aims or
rather objectives as well as the authority or authorities that man the equipment as well as being
responsible for the achievement of the goals. From this his point of view, it is rather clear that
financial stability policy, as well as monetary policy, are distinct or somewhat distinct, and their
different understandings based on their differences is very vital. Lars goes further to exploit the
financial system; in the form of flexible inflation targeting that has the objective of stabilizing
both booms around the inflation target in addition to resource utilization around a level that is
sustainable. According to him, under standard scenarios, the suitable instrument is the
communication as well as policy rate, which includes the publication of forecasts of the real
economy, the policy rate as well as inflation. He further exposes that during times of crisis, as
have been experienced by many during the financial crisis, to be specific when the policy rate is
close to or at the zero lower bound, other more unconventional practices.
The Fed has distinct roles as a central bank and a regulator. Its main regulatory
responsibilities are as follows:
Regulation
The Fed controls bank holding companies (BHCs) as well as thrift holding companies
(THCs), which include all large as well as thousands of small depositories, for safety and
soundness. The Dodd-Frank Act requires the Fed to subject BHCs with more than fifty billion
dollars in consolidated assets to enhanced economic regulation, which is stricter than those
The Federal Reserve 45
standards that are applied to undistinguishable firms, in an attempt to block the likeability of
well-ordered risks that they are likely to present. The Fed is also the prudential controller of the
United States side streams of foreign banks as well as state banks that have been chosen to act as
members of the Federal Reserve System. Often in conjunction with the other banking regulators,
communicate or publicize directives or acts as well as supervisory measures that are about banks
in areas including adequacy of capital, as well as critical analysis of depository firms under its
supervision to strictly ensure that these guidelines are followed to the latter, and these firms
conduct business prudently without unethical issues. The Fed's supervisory authority comprises
of consumer protection for banks under its jurisdiction having about ten billion dollars or less
regarding assets.
Prudential regulation of nonbank systemically important financial institutions
The Dodd-Frank Act allows the Financial Stability Oversight Council (FSOC) to assign
nonbank financial firms as systemically significant (SIFIs). These designated firms are then
supervised by the Fed regarding safety as well as soundness. Since this enacting, the number of
chosen firms has ranged between four, which happened in the earlier days, and one today.
Payment System Regulation
The Federation reserve also controls the wholesale as well as a retail payment system for
both soundness’s as well as safety. The Federation Reserves also operates parts of the operations
of payments, which includes interbank settlements as well as clearance checking. The Dodd-
Frank Act, on the other hand, regulates payment, settlement systems as well as clearing
designations systematically.
The Federal Reserve 46
Basing on these as well as other similar observations, some commentators have
concluded that the impacts of capital flows to other countries should be taken into account in, for
instance, Federal Reserve policy decisions. For example, Eichengreen, Rajan, and Prasad (2011)
reason that the political authorities in large production companies or those with significant
economies of scale should employ or consider external effects which act as players of vital roles
in the monetary policy framework. Central banks or instead national banks in these specific
nations should focus more attention on their corporate policy stance as well as their global
consequences. Lars does not buy this assumption since he does not agree with it. The Fed's
mandate, according to him concerns the United States inflation and employment, as well as the
Federal Reserve should not be put to blames for rising, real developments, as well as fiscal
policy in other countries except as they feed back into the United States. That form of
responsibility should be put on policy authorities in those other countries. States according to
him can choose to stabilize their dollar exchange rate. This monetary policy may in many
instances sound too complicated to the concerned countries, creating an overheated economy
with risks for bubbles and other adverse impacts. A steady as well as flexible exchange rate will
enable different countries to make their choices when conducting an independent monetary
policy appropriate for the country in question. In particular, they would be able to respond
appropriately to changes in interest rates and other variables in the rest of the world. If countries
choose a stick or rather rivet to the American dollar, with capital inflows, bubbles, and other
adverse effects, they are themselves responsible for these undesirable effects.
The two authors expounds on the post monetary crisis era when Federative Reserve was
mandated by the Senate to help in countering these moments after the crisis. They bring deep
insight on the policies that were established by the Federation Reserve to help the United States
The Federal Reserve 47
to get over the post-financial crisis era around 2007. The Fed came up with very radical changes
which were blamed for inflation as well as unemployment in the United States of America.
Data Analysis
The primary data collected in the field represent answers to the questions in the problem
statement section of this dissertation paper as well as a fulfillment of the objectives of this paper.
The Federal Reserve System is portrayed as the central bank of the United States of America
mandated after the financial crisis of the 2008/2009 when the financial markets of the developed
countries collapsed. The Federation Reserve was therefore mandated to help in the rebuilding of
these collapsed financial markets of the United States of America. From the interview, it is
established that many within the United States of America do not think that it was not believed
that the Congress made the right choice to mandate the Fed to help in the rebuilding of the
financial markets. Some of those interviewed raised concerns on the contributions of the Feds
especially questioning the policies with which they introduced after the financial crisis.
The Fed has been criticized due to the idea of pure fiat currency, a currency that is made
up by the central bank and not backed by any precious metal such as gold and silver. Many
people share in this school of thought including leaders within the United States of America, for
example, Honorable Ryan Paul, a former presidential candidate representative who has always
insisted that the United States should end the Fed and return the United States dollars to the gold
standards. Representative Ryan Paul also believes that the United States dollar should be backed
by broad baskets of commodities unlike a particular metal such as gold. Generally, Fred's
conduct critics during the crisis can be divided into two camps, that is, those who complain the
The Federal Reserve 48
Fed has not offered much during its operational days as was expected as well as some who
complain of its excessively inflationary unconventional monetary policies. The inflation critique
has been backed up by the congress people who have made their intention of changing the Fed's
mandate to a single-minded focus to ensure the stability of prices rather than its dual order on
unemployment and inflation making it the most prominent critique. This has been the case
although this criticism is not understandable since inflation has been unusually low since the
implementation of the Feds monetary policies. The critiques on inflation and unemployment
argue that the Fed should be engaged on severe, more aggressive actions to stimulate the
economy. The Fed has several possible options of stimulative money policies at their disposal
and therefore should adopt these policies to enhance its effectiveness as well as acceptability
within the United States of America as well as the whole world. One option is the adoption of a
more quantitative easing. This is a straightforward adjustment. The underlying logic is usually
straightforward since the Fed can decide to do more and more quantitative easing if they are
confident that quantitative easing boosts demand if inflation is low and unemployment high.
A good percentage of the United States citizens at least have an idea of the existence of
the Feds as well as their importance or instead their roles. From the survey as well as the
questionnaires, it is clear that a good number believe that the Feds have done an excellent job
since they were established and mandated by the Congress to help the country as well as the
world to stabilize their financial markets. Many have blamed them for causing further damages
including further inflation as well as diluting the dollars and not making it as secure as it was
before indicating that a good number of the citizens, on the other hand, have not been impressed
with their achievements. A good number gave them a five as well as four stars, indicating their
appreciation for the work that has been done by this institution, whereas others so it as deserving
The Federal Reserve 49
of a one star. Therefore, we can assume that some do not have a bright idea of the mandates of
this institution since they are not mandated to deal with inflation in the United States as well as
any other country.
It was also established that the Federal Reserve has come up with policies that have not
been accepted wholeheartedly by the citizens as good enough to handle situations after the
financial crisis. The Fed has always influenced the interest rates as a measure to help in
controlling sensitive interest spending, for example, household spending on consumer durables,
business spending on plant and equipment, as well as residential investments. In addition to
these, whenever interest rates differ between countries, capital flows arises thereby affecting the
exchange rates between the dollar and the foreign currencies, which will, in turn, affect the
spending on exports as well as imports. Using this technique, these post-financial crisis policies,
therefore, are capable of being utilized in stimulating as well as slowing down the aggregate
expenditure on a short-term basis but in the long term affects inflation. A slow, as well as stable
inflation rate, promotes transparency of price typically, therefore, sounding economic decisions.
The Fed initially tried to engage stimulus by germy buying of Treasury as well as mortgage
subsidized securities while their target at the zero lower bound. This practice was later on as well
as today referred to as Quantitative Easing (QE). Quantitative easing was done majorly between
the year 2009 and 2014, about three rounds. The third round of the Quantitative Easing ended in
the year 2014, October when the Federal Reserve's balance sheet was at around four point five
trillion dollars, five times that which existed before the crisis.
From this history of actions by the Federal Reserves, many have always criticized their
choices of activities. In the secondary data collected, an analysis is brought in where their efforts
are criticized as well as appreciated. They also bring on board options that the Federal Reserve
The Federal Reserve 50
can utilize to adequately guarantee a good job. They can use the opportunity of completely
abandoning the present inflation targeting regime in favor of the Nominal Gross Domestic
Product. Normal Gross Domestic Product is the country's total economic output volume before
making any adjustments for inflation. Using this school of thought, the Fed can reason that there
is standard nominal spending that it would love to see in action and is indifferent if it takes the
form of merely higher prices or rather more real growth. The idea is that this action will ensure
that people as well as businesses remove their money out of ultra-safe debt given by the
government as well as cash and employ them in real investments. If the Normal Gross Domestic
Product target is valid, then either the economy will experience a lot of inflation in the next
couple of years or else the economy will proliferate over the subsequent duration of years, during
which individuals will take advantage of the opportunity and invest in it. This approach has been
applauded by prominent individuals, for example, academic monetary economist Michael
Woodford, Christina Romer, former Obama's economic advisor as well as Jan Hatzius, the chief
economist of Sachs Goldman. The Fred is also criticized by creating new money and placing
them directly in the hands of governments or individuals instead of the banking system. Before
becoming the Federal Reserve chair and before the economic crisis, Ben Bernanke analyzed the
possibility that at zero bounds, there was little or rather nothing by the Japan banks. One way of
practicing this is when the federal government fiat currency enacts to ensure a significant tax cut
as well as to ensure that the Fed make up the lost revenue by printing new money. The money
can also be given to the state government to allow different politicians to devise it and employ it
to the right use in a host of ways.
The roles of the central bank in the regulation of money circulation in the country are also
a major issue of consideration that appeared in the period after the crisis. The central bank's
The Federal Reserve 51
strategy usually aims at controlling the economy through the regulations critical financial aspects
other than the physical flow of money in a country. Therefore, the governments and central
banks usually collaborate in setting up the most significant policies especially in the event of
financial challenges. Physical control has been proven to have numerous disadvantages than the
other measures that include the control of interest rates that apply in the inter-bank lending
processes. The advent of electronic money systems and that of the modern financial instruments
is a significant factor that facilitated the shift from the necessary monetary controls. The
conventional measures have been proven to be unpredictable and easily affected by the
variations in preferences. The systems of lending have been revolutionized in the recent trends,
and the Federal Reserve in the country acknowledged this change in its implementation.
Federal Reserve policy preferred controlling the interest rates over the control of bills in
circulation in the country through the enactment of policies that enhanced the implementation of
these decisions. The policy focused on the levels of lending and saving that are crucial in the
economy. The policymakers argued that a change in the interest rates affect numerous
stakeholders in a way that can cause positive impacts on the entire economy. Also, the Federal
Reserve monetary policy also offered another approach towards gaining solutions to the
problems in the crisis. This strategy focused on three areas that were deemed to be essential to
the economy of the state. Firstly, the policy sought to rationalize the prices in the country. Price
stability has a significant impact on the economy since both inflation and deflation of prices have
adverse consequences on its growth. For instance, inflation reduces the value of savings that can
have negative implications for the economic growth and also creates a difficulty in the making of
financial decisions. Deflation, on the other hand, leads to postponement of investments and
purchases that threaten to cause a slowdown in the economy of the country.
The Federal Reserve 52
Therefore from these indications the federal Reserves it is realized that they have handled
the post-financial crisis with the implementation of many policies that never existed before and
for that particular reason has proven to try all possible mechanisms to achieve their mandate.
Although many people think otherwise, it is clear that they handled the post-financial crisis with
a lot of expertise which involved the application of many policies to help steer out the United
States as well as other countries out of the financial crisis. Many states across the world have
blamed the Federal Reserve for inflation in their motherland which is outrageous. It is very
suspicious as well as malicious to blame the central bank of the United States of America for
causing inflation in another country that has its central bank which has implemented its finances
as well as monetary policies within its jurisdiction. If their systems are failing, then they should
take up the responsibility and initiate measures of ensuring that they get out of these tough
situations. Playing blame games will not help achieve any good fruits or solve these problems
that they face in their different countries. Therefore, different countries should come up with
their policies to help sustain their financial situations in their various nations since all states face
a different financial crisis at different times in different countries.
Skewness and Testing normality
Skewness is the measure used to analyze the asymmetry of the probability to establish the
distribution of a real-valued random variable as a factor of its mean. Skewness can either be-be
positive or negative or even undefined. This factors not a direct factor and might mean the
opposite since it does not follow any rule. A skewness of zero indicates that the tails on both
sides of the mean balances are indicating normality, that is, normal distributing.
The Federal Reserve 53
The inflation rate has always been undefined since it always comes unexpectedly. This
has always made its skewness to be undefined and therefore their normality test has also always
been negative. It produces an abnormal distribution when plotted on a graph.
Trends established
The United States government has been accredited for its ability to respond timely to the
crisis of any sort with both wits as well as financial investments on measures to go through this
crisis and have the upper hand. The government applied the principle of financial mitigation. The
central bank was advised not to be mean on their lending, and that is why they usually lower
their when the financial crisis comes in. The central bank has also maintained its confidence in
the safety of the banking system which has made the citizens have access to their money no
matter the bank since dough cannot be finished in these banks. The Federal Reserve was also a
government mandated institution that has helped to sustain the economy even in the midst of
financial crisis. The government has also purchased impaired assets from the banks' balance
sheets until markets improve during the financial crisis to help in sustaining these fundamental
institutions. Different governments have different ways of countering financial crisis and even
more trends are being developed as possibilities of economic crisis can never die down.
The Federal Reserve 54
Conclusion
There have been perhaps very few occasions when the financial markets of the United
States experienced a near total collapse. The great depression was viewed by far the worst such
experience and henceforth been used as a benchmark for all subsequent crashes. Because of its
severity, it has been at the forefront of many economists research, and even a couple of decades
later, it still ignites lively debate as to the real cause of the crash. Capitalist economies are
considered one of the most stable on the planet and thanks to the interventions of the United
States in many countries policies around the world; it has been accepted as a standard by most
nations with only a few notable exceptions. The inevitable thing about capitalist economies is
that eventually, the market corrects itself to keep the whole system in equilibrium. During these
instances, there are usually sudden drops in the market capitalizations of stocks as bubbles in
specific economic sectors burst. These so-called bubbles are situations in which investor
speculation in those sectors influence prices to go beyond the levels that are sustainable as at the
moment. This results in a massive pullout by the late joiners to the game which further
compounds the instability already present.
In most cases, however, enough confidence is usually restored in the investors to make
them hold their stocks are hence stemming the downward spiral. This narrative is not the general
story for all financial downturns, and the causing agents are usually a diverse range of factors
and not just a single sector. Over the course of the United States history, there have been a few
financial meltdowns since the depression of the thirties including the crash of 1987 and the dot-
com bubble of the beginning of the 21st century. In all these cases, the severity was not as high
as the one seen in the crash of 2008 which made the world to doubt the capitalist system though
only for a short time. This terrible event necessitated a comprehensive response by international
The Federal Reserve 55
governments to address the negative consequences of the crash. In the United States, the
institution trusted to handle the after-effects of the financial meltdown is the Federal Reserve
System which uses a range of tools to control inflation and unemployment. The objective is to
stimulate spending in the economy at a high enough level to keep businesses and consequently
people running them employed.
Summary
The Federal Reserve System was set up with several objectives in mind; it would act as
the central bank of the United States and regulate the inflation while reducing unemployment in
the economy. To accomplish these tasks, it was made to be independent of the government and
entrusted with a range of tools including the sole authority to regulate the banking industry and
the lending rates. Moreover, asset acquisition by banking institutions and financial markets
liquidity are significantly shaped by the Federal Reserve.
In this study, there have been some issues rose for research purposes and have thus been
tackled systematically to satisfy the research needs of this thesis. The thesis begins by giving
brief background information and on the role played by the Federal Reserve System in the
economy of the United States including the reasons for it established and a brief history of the
institution. Furthermore, it outlines the research questions that are later tackled in the in the bulk
of the thesis. These questions have been systematically answered by keeping to the stated
methodology to synthesize information that will be used by future readers as sources or materials
since it will relay unique as well as simple information which will readily be understood by all.
The stated hypotheses are also explored to arrive at a conclusion which can shed new light on the
matter.
The Federal Reserve 56
The literature review section entails the discussion of the various secondary sources from
which unique insights into the topic have been provided by the authors. One such book is by
economist Glenn Rudebusch who is perhaps one of the best authorities on the matter of the
FED's response to the crisis. He dissects the possible cause of the crisis and in his concluding
statements admits that it is nearly impossible to pinpoint any particular purpose of the meltdown.
In the sections that follow the literature review, the methodology of the report outlines how the
best scientific methods of analysis chosen for the research. Their strengths and shortcomings are
expounded upon, and they are scrutinized for their ability to deliver a report that replicable. This
reliability of findings is essential due to the requirements of professionalism in economics
research and the addition of more knowledge to the discipline.
The data collection segment implements the outlined methods of research to gather the
necessary information for analysis. Some of the methods used include online surveys, interviews,
questionnaires, focus groups, observations and a myriad of secondary sources. These sources
have been useful to the completion of the necessary research and have yielded a lot of data that
was analyzed to give the findings. Secondary sources have a particular advantage in that it is
readily available to the public and therefore are cheap. Moreover, they contain historical data
from which useful trends can be drawn from as well as policies which can be applied in the event
of a future occurrence of a crisis. From most of the articles written on the contributions of the
Federal Reserves after the 2008/2009 fiscal crisis, it is clear to acknowledge that this central
bank has done a lot of services to the United States as well as the whole world. The United States
government, therefore, have done the right thing in its mandating and forming this body to help
in solving the financial crisis. It is very impressing to come to the fact that most of the American
citizens are aware of this body as well as its functions and contributions. This alone indicates that
The Federal Reserve 57
this is a working system that has touched the lives of all the American lives in one way or the
other.
The Federal Reserve 58
References
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mouth operations or interest rate smoothing?. Journal of Banking & Finance, 28(3), pp.475-498.
Kool, C. and Thornton, D.L., 2015. How effective is central bank forward guidance?.
Gambacorta, L., Hofmann, B., and Peersman, G., 2014. The effectiveness of
unconventional monetary policy at the zero lower bound: A cross‐country analysis. Journal of
Money, Credit and Banking, 46(4), pp.615-642.
Thornton, D.L., 2012. The Dual Mandate: Has the Fed Changed Its Objective?. Federal
Reserve Bank of St. Louis Review, 94(2), pp.117-133.
Thornton, D.L., 2012. How did we get to inflation targeting and where do we need to go
to now? a perspective from the US experience. Federal Reserve Bank of St. Louis Review, 94(1),
pp.65-81.
Bernanke, B.S. and Kuttner, K.N., 2005. What explains the stock market's reaction to
Federal Reserve policy?. The Journal of finance, 60(3), pp.1221-1257.
Bullard, J., 2010. Seven faces of" the peril". Federal Reserve Bank of St. Louis Review,
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McDonald, D.J., and Thornton, D.L., 2008. A primer on the mortgage market and
mortgage finance. REVIEW-FEDERAL RESERVE BANK OF SAINT LOUIS, 90(1), p.31.
Thornton, D.L. and Garfinkel, M., 1991. The multiplier approach to the money supply
process: a precautionary note. Federal Reserve Bank of St. Louis Review, July/August, pp.47-64.
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Svensson, L.E., 2011. Monetary policy after the crisis. Speech at the Federal Reserve
Bank of San Francisco, 29.
Gerlach, S., 2013. Monetary policy after the crisis. The Manchester School, 81(S1),
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monetary Economics, 58(1), pp.17-34.
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Arestis, P. and Sawyer, M., 2010. What monetary policy after the crisis?. Review of
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De Leeuw, F. and Gramlich, E.M., 1968. The Federal Reserve-MIT economic model.
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Bernanke, B.S., 2005. The global saving glut and the US current account deficit (No. 77).
Romer, C.D. and Romer, D.H., 2000. Federal Reserve information and the behavior of
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interest rates. American Economic Review, 90(3), pp.429-457.
Meltzer, A.H., 2010. A History of the Federal Reserve, Volume 2. University of Chicago
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Federal Reserve policy. Journal of Futures Markets: Futures, Options, and Other Derivative
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Federal Reserve Bulletin, (Jan), pp.11-40.
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irrational or just cautious?. Journal of Monetary Economics, 55(8), pp.1415-1427.
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