You are worried that the economy is facing a downturn. What actions can you take using the Federal Reserve?

Expert Answers

An illustration of the letter 'A' in a speech bubbles

The Federal Reserve (Fed) can do a few things to help the economy. It can lower the interest rate by which it loans money to banks. This means that banks can lower the rates they give consumers to buy large items such as cars and homes. Lower interest on certificates of deposit can lead investors to put more of their money into stocks.

The Fed can also reduce the reserve ratio which would free up more money for bank lending; this rarely happens, as the people's faith in the banks holding their deposits is key to a sound economy.

The Fed can provide money to central banks in foreign countries when American interests are at stake. This, in turn, ensures that American exports stay high.

The Fed can also buy government securities in order to put more money into the system.

All of these things take time and will not end a recession overnight.

Approved by eNotes Editorial
An illustration of the letter 'A' in a speech bubbles

The Federal Reserve (also known as the Fed) is in charge of monetary policy for the United States.  Therefore, if you fear a recession, you can use the Fed to carry out expansionary monetary policy to try to get the economy to grow.  There are, in theory, three actions the Fed could take.

First, the Fed could decrease the required reserve ratio.  If the Fed did this, banks would be able to lend more money.  This would increase economic activity and the economy would grow.  In practice, the Fed rarely does this.

Second, the Fed could lower interest rates.  If the Fed charges lower interest rates when it loans money to banks, the banks will charge lower interest rates when they lend money out.  This will increase lending and the economy will grow. The Fed does this at times, but it cannot really do that right now because interest rates are already very low.

Finally, the Fed could buy government securities in open market operations.  When the Fed does this, it gives banks money in return for government securities.  In essence, it is creating money that did not previously exist.  This is the tool that the Fed uses most often because it can be carried out on a day-to-day basis as circumstances warrant.

See eNotes Ad-Free

Start your 48-hour free trial to get access to more than 30,000 additional guides and more than 350,000 Homework Help questions answered by our experts.

Get 48 Hours Free Access
Approved by eNotes Editorial