How crisis reshaped the monetary toolkit

The Fed responded to the 2008 financial collapse by adopting new strategies and extending the range of assets it acquired. Under various programs, loans to financial institutions amounted to $1.7 trillion of which 62 percent was borrowed by 20 large banks at a mean interest rate of 0.48 percent. The Fed also began a round of asset purchases in November 2008 known as quantitative easing. By May 2013, the central bank had added $3.5 trillion to its balance sheet but it was not getting the jobs and recovery it wanted. Its decision to pay interest on reserves may have helped preserve bank capital but undermined incentives to lend. The anemic outcome of its strategies suggests that the Fed needs to reassess its countercyclical policy tools in the context of a radically changed financial system in which traditional relationship banking has been replaced by a collateralized market system.