Which of the following statements is most accurate about the Fed's use of the federal funds rate target since the 2008 ﬁnancial crisis?
A) It stimulated quick recovery from the Great Recession, and the target is now at pre-crisis levels.
B) The target has become signiﬁcantly more important as a tool for signaling policy changes.
C) The Fed effectively lost the ability to use the target for monetary policy since there is a lack of reserves today.
D) The Fed effectively lost the ability to use the target for monetary policy since banks no longer have a problem meeting their reserve requirement.

Question

Quizplus · Accepted Answer

Since the 2008 financial crisis, excess reserves held by banks at the Fed increased significantly, leading to an abundance of reserves in the system. As a result, the federal funds rate became less responsive to changes in the target rate because banks were no longer constrained by reserve requirements. Therefore, the Fed has lost some of its ability to use the federal funds rate as a tool for monetary policy. Option A is incorrect because the recovery from the Great Recession was not solely due to the federal funds rate target, and it is not at pre-crisis levels yet. Option B is partially correct, but it is not a significant change since the crisis. Option C is incorrect because there are still reserves in the system, although in excess.

Which of the Following Statements Is Most Accurate About the Fed's