Financial Turmoil: Federal Reserve Policy Responses

The Federal Reserve (Fed) has been intimately involved in the current financial turmoil since it began in August 2007. It has sharply increased reserves to the banking system through open market operations and lowered the federal funds rate and discount rate on several occasions. As the turmoil has progressed without signs of subsiding, the Fed has introduced new policy tools to try to restore calm. In December 2007, it began to auction off reserves to member banks through the newly created Term Auction Facility (TAF). Equivalent in economic effect to the discount window, the TAF allows the Fed to control how much direct lending was undertaken and removes the stigma attached to the discount window that may have made member banks reluctant to access it. In March 2008, it created the Term Securities Lending Facility (TSLF) to expand its Treasury securities lending program. Under the new program, it allowed the primary dealers (financial institutions who are counterparties to the Fed in its open market operations) to temporarily swap their less liquid assets for Treasury securities. Source: Congressional Research Service

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