The Federal Reserve's response to the crisis

The Federal Reserve responded aggressively to the financial crisis that emerged in the summer of 2007. The reduction in the target federal funds rate from 5-1/4 percent to effectively zero was an extraordinarily rapid easing in the stance of monetary policy. In addition, the Federal Reserve implemented a number of programs designed to support the liquidity of financial institutions and foster improved conditions in financial markets. These new programs led to significant changes to the Federal Reserve's balance sheet.

In light of improved functioning of financial markets, many of the new programs have expired or been closed. These include the Money Market Investor Funding Facility (MMIFF), the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), the Term Securities Lending Facility (TSLF), and the Term Auction Facility (TAF). The temporary liquidity swap arrangements between the Federal Reserve and other foreign central banks (FCBs) expired in February 2010. However, in May 2010, temporary dollar liquidity swap lines were re-established with certain FCBs. Subsequently, these arrangements were extended through August 1, 2011, and then through August 1, 2012.

The tools described in this section can be divided into three groups. The first set of tools, which are closely tied to the central bank's traditional role as the lender of last resort, involve the provision of short-term liquidity to banks and other depository institutions and other financial institutions. The traditional discount window, Term Auction Facility, PDCF, and TSLF fall into this category. Because bank funding markets are global in scope, the Federal Reserve also approved bilateral currency swap agreements with 14 foreign central banks. These swap arrangements assisted these central banks in their provision of dollar liquidity to banks in their jurisdictions.

A second set of tools involve the provision of liquidity directly to borrowers and investors in key credit markets. The CPFF, AMLF, MMIFF, and the Term Asset-Backed Securities Loan Facility (TALF) fall into this category. All of the programs are described in detail elsewhere on this website.

As a third set of instruments, the Federal Reserve has expanded its traditional tool of open market operations to support the functioning of credit markets through the purchase of longer-term securities for the Federal Reserve's portfolio. For example, in November 2008, the Federal Reserve announced plans to purchase up to $100 billion in government-sponsored enterprise (GSE) debt and up to $500 billion in mortgage-backed securities. In March 2009, the Federal Reserve announced plans to purchase up to $300 billion of longer-term Treasury securities in addition to increasing its total purchases of GSE debt and mortgage-backed securities to up to $200 billion and $1.25 trillion, respectively.

In August 2009, the FOMC announced that, to promote a smooth transition in markets, it would gradually slow the pace of its purchases of Treasury securities. In September 2009, the FOMC made a similar statement about its purchases of agency and agency mortgage-backed securities. The full amount of announced Treasury security purchases were completed in October 2009. In November 2009, the Federal Reserve announced that the total purchases for agency debt would be $175 billion, somewhat less than previously announced, reflecting the limited availability of agency debt.

As the performance of financial markets has improved, the Federal Reserve has wound down some of the programs. The MMIFF expired October 30, 2009. The AMLF, CPFF, PDCF, and TSLF were closed on February 1, 2010. The temporary liquidity swap arrangements between the Federal Reserve and other central banks were also terminated in February 2010, but in May 2010 the dollar liquidity swap lines were re-established with some central banks, in response to the re-emergence of strains in short-term U.S. dollar funding markets. In December 2010, the FOMC authorized an extension of the arrangements through August 1, 2011. In June 2011, the FOMC authorized another extension of the arrangements through August 1, 2012. The Federal Reserve Board authorized extensions of credit through the TALF until June 30, 2010, for loans collateralized by newly issued CMBS and through March 31, 2010, for loans collateralized by all other TALF-eligible securities. The TALF was closed to new lending as anticipated.

In August of 2010, the FOMC announced that the Federal Reserve would maintain the level of domestic securities holdings in the SOMA portfolio by reinvesting principal payments from agency debt and agency MBS in longer-term Treasury Securities. In November 2010, the FOMC decided to expand its holdings of securities and announced that it intended to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. This expansion was completed as scheduled, on June 20, 2011.

On September 21, 2011, the FOMC announced that it would extend the average maturity of its holdings of securities--by purchasing $400 billion par of Treasury securities with remaining maturities of 6 years to 30 years and selling an equal par amount of Treasury securities with remaining maturities of 3 years or less--by the end of June 2012. The FOMC also announced that it will reinvest principal payments from its holdings of agency debt and agency MBS in agency MBS. In addition, the FOMC will maintain its existing policy of rolling over maturing Treasury securities at auction.

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