US Fiscal Policy In Recession: What's Next?

The US recession that began in December 2007 is likely to be the longest recession since the Great Depression. It is clearly the most severe in decades. In response, the US government has actively applied the tools of monetary and fiscal policy. On the monetary side, the Fed lowered its target for the Federal Funds rate ten times between September 2007 and December 2008, starting at 5.25 percent and finally reaching an effective minimum range of 0 to 0.25 percent. To augment this standard monetary policy tool based on the purchase of government bonds, the Fed has also engaged in purchases of a range of other financial assets on an unprecedented scale. All told, the Fed provided more than 1 trillion US dollars in financial support to banks, corporations, money market funds, and other institutions through the end of 2008, with outstanding reserves rising accordingly.

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