The Federal Reserve’s Response to the Financial Crisis
Today I want to talk about the Federal Reserve’s response to the financial crisis. In the last couple of lectures I mentioned a key theme, the two main responsibilities of central banks—financial stability and economic stability. Let me turn it around and talk about the two main tools. For financial stability, the main tool the central banks have is lender of last resort powers by providing short-term liquidity to financial institutions, replacing lost funding. Central banks, as they have for a number of centuries, can help calm a financial panic. For economic stability, the principal tool is monetary policy; in normal times, that involves adjusting short-term interest rates.