How did the Federal Reserve respond to the subprime crisis?
On September 18, 2007 the Federal Reserve announced that it would reduce interest rates in response to the “tightening of credit conditions.” The Federal Reserve (Fed) continued to lower interest rates, all the way to zero, which may have had some unintended consequences (see Q13). In December 2007, the Fed opened the Term Auctions Facility, the first of many credit facilities that allowed banks greater access to emergency funding. On March 11, 2008 the Federal Reserve introduced another credit facility, the Term Securities Lending Facility, to purchase mortgage-backed securities from banks (see Q3). Ultimately, these responses would not be enough to stop the collapse of Bear Stearns in March of 2008, nor the full-blown financial crisis six months later.
