Crisis Monetary Policy

During the 2008 financial crisis, the Fed expanded upon Conventional Monetary Policy by expanding it’s lending to shadow banks. Additionally the Fed lent to foreign central banks via swap lines, this represented a turn where the fed is now backing the global dollar system. During the COVID-19 financial crisis, the Fed began lending to private business via the Primary and Secondary Corporate Facilities where they bought corporate bonds. The concern with the change in this policy is moral hazard, where players will take risks feeling they are isolated from the consequences by the Fed. The Fed responded to this concern with regulation1.

  • 3-Month overnight Index swap: roughly the expected average federal funds rate for the next 3 months
  • Short term interest-rate market stress is measured by spread between 3-month LIBOR and 3-Month overnight index swap. When the spread is wide, distress is high.

References

1.
Wang, J. J. Central Banking 101. (Joseph, 2021).

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