The U.S. central bank, the Federal Reserve, has a 澳洲幸运5官方开奖结果体彩网:dual mandate: To achieve low unemployment and to maintain stable prices throughout the economy. During a recession, 澳洲幸运5官方开奖结果体彩网:unemployment rises, and prices sometimes fall in a process known as 澳洲幸运5官方开奖结果体彩网:deflation.

During steep economic downturns, the Fed mಌay take dramatic steps to suppress unemployment and bolster prices, both to fulfill its traditional mandate and to provide emergency support to the U.S. financial system and economy.

The Impact of a Recession

At the onset of a 澳洲幸运5官方开奖结果体彩网:recession, some businesses begin to fail, typically due to a combination of real 澳洲幸运5官方开奖结果体彩网:economic shocks and falling demand. These businesses may lay off workers, sell assets, or even default on their debts and go bankrupt. All of these things put downward pressure on prices and the supply of credit to businesses in general, which can spark a process of 澳洲幸运5官方开奖结果体彩网:debt deflation.

Deflation, in the form of falling prices, is not generally a harmful process for the economy or a problem for most businesses and consumers by itself. However, it is widely feared by central banks and the broader 澳洲幸运5官方开奖结果体彩网:financial sector, especially when it involves debt deflation. Debt deflation increases the real value of debts and thus the risk to debtors. Banks and related institutions are typically among the largest debtors in any modern economy. To protect banks from defaulting on their overextended debts, the Federal Reserve does not hesitate 澳洲幸运5官方开奖结果体彩网:to take action in the name of stability.

The 澳洲幸运5官方开奖结果体彩网:Federal Reserve has a number of tools to manage the economy during a recession in pursuit of these goals. These tools largely fall into several 𒆙categories, which w♈e will look at below.

Open Market Operations

The Fed can lower interest rates by buying 澳洲幸运5官方开奖结果体彩网:debt securities on the open market in return for newly created bank credit. Flush with new reserves, the banks that the Fed buys from are able to lend money to each other at a lower 澳洲幸运5官方开奖结果体彩网:federal funds rate, the rate at which banks lend to each other overnight. The Fed hopes that a drop in 澳洲幸运5官方开奖结果体彩网:interest rates spreads throughout the financial system, reducing the cost of borrowing f𓃲or businesses and consumers.

Lower rates make it cheaper for companies to borrow, allowing them to go into more debt rather than defaulting or laying off staff. That helps keep employees in their jobs and prevent unemployment from rising. Lower interest rates also enable consumers to make more purchases on credit, keeping consumer prices high.

There are times when interest rates won’t go any lower, because banks prefer to hold on to the new reserve credit as liquid reserves against their debt obligations. In these cases, the Federal Reserve may continue 澳洲幸运5官方开奖结果体彩网:open market operations, buying bonds and other assets to flood the banking system with new credit. This is known as quantitative easing (QE)—the direct purchase of assets by the Federal Reserve to inject more money into the economy and expand the 澳洲幸运5官方开奖结果体彩网:money supply.

The Fed has used quantitative easing on several occasions since 2008, including in March 2020, when the central bank launched an initial $700 billion QE plan aimed at propping up the debts of the financial system on top of most of the nearly $4 trillion in QE that it created during the 澳洲幸运5官方开奖结果体彩网:Great Recession.   

Lowering Capital Requirements

The Fed also can regulate banks to ensure that they are not 澳洲幸运5官方开奖结果体彩网:required to hold capital against potential debt redemption. Historically, the Fed was charged with regulating the banks to make sure they maintained adequate liquid reserves to meet redemption demands and remain solvent. During recessions, the Fed could also lower requirements to allow banks greater flexibility to run their reserves down, at the risk of increasing the 💫banks’ financial vulnerability.

After the 澳洲幸运5官方开奖结果体彩网:2007–08 financial crisis, quantitative easing resulted in banks holding massive ongoing bala🔯nces of reserves, far exceeding the required reserve ratio. During the COVID-19 pandemic, the Fed eliminated all reserve requirements for banks. This left the Fed no further room to use this tool to loosen credit conditions for any impending recessions.

Discount Lending

The Fed can directly lend funds to banks in need through what is called the discount window. Historically, this type of✃ lending was carried out as an emergency bailout loan of last resort for banks out of other options—and it came with a hefty interest rate to protect the interests of taxpayers, given the risky nature of the loans.

However, in recent decades, the practice of discount lending by the Fed has shifted toward making these risky loans at much low𒐪er interest rates to favor the interests of the financial sector as much as possible. It has also rolled out a host of new lending facilities similar to discount lending, targeted at supporting specific sectors of the economy or the prices of specific asset classes.

In March 2020, the Fed dropped its 澳洲幸运5官方开奖结果体彩网:discount rate to a record low 0.25% to give extraordinarily favorable terms to the riskiest of borrowers. However, by March 2025, a series of assertive rate increases enacted by the Fed to cool high inflation had returned the discount rate to 4.5%.

Expectations Management

Expectations management is also known as forward guidance. Much of the economic research and theory on financial markets and asset prices acknowledge the role that market expectations play in the financial sector and the economy more broadly, and this is not lost o𒊎n the Fed.

Doubt as to whether the Fed will act to bail out banks and 澳洲幸运5官方开奖结果体彩网:keep asset prices inflated can lead to pessimism among investors, banks, and businesses on to𝓡p of t♎he real problems facing the economy. 

Fighting🧔 Inflation and the Specter of a Recession

澳洲幸运5官方开奖结果体彩网:Inflation occurs when prices rise in the economy and the 澳洲幸运5官方开奖结果体彩网:purchasing power of the dollar erodes. The Fed targets around 2% inflation 🃏per year, and during a recession, inflation may indeed remain well below this target, allowing the central bank to maintain expansionary monetary policy.

However, expansionary monetary policy can also eventually lead to inflation. If the economy ꦡis operating near capacity and there are not enough workers to fill all the jobs available, or if wages are rising faster than productivity growth, more people will borrow money to fund additional consumption.

Low unemployment ⛄allows workers to bargain for higher wages, leading to a wage-price spiral where businesses raise prices to match their increased labor costs. The availability of cheap credit may also lead to increased borrowing, spending, and investing, leading to both economic growth and higher prices. These factors, when combined, can cause an inflationary rise in asset prices in the economy.

In periods of high inflation, central banks fight price pressures by raising interest rates and/or implementing contractionary policies such as increasing bank 澳洲幸运5官方开奖结果体彩网:reserve requirements or raising interest rates.

Explain Like I'm Five

The Federal Reserve, the centra♒l bank of the United States, fights recessions by adj🍰usting the flow of money through the economy. This is called monetary policy.

The Fed has three important tools to control the flow of money. First, it can adjust the interest rate for loans between banks, encouraging people to borrow 🃏and spend more money. It can also adjust the amount of money that banks must keep in their va🅘ults, which affects the amount of lending.

The Fed can also buy and sell goverꦇnment debt. Buying debt injects new dollars into the economy, which circulate and increase economic activity. When the Fed wants to reduce the money supply, it sells debt and takes money out of circulation.

The Bottom Line

During recessions, the Fed generally seeks to reassure market participants through its actions and public announcements that it will prevent or cushion its member banks and the financi🃏al sy🎃stem from suffering too-heavy losses, using the tools discussed above.