The Law of Monetary Policy

Towards the end of 2007 and the beginning of 2008, the Federal Reserve began using — or reviving — innovative tools for providing liquidity to the financial markets. This paper examines the types of tools at the disposal of the Federal Reserve System and highlights how the Federal Reserve attempts to keep credit risk off its balance sheet. I further argue that the current situation in the financial markets is not one due to a dearth of liquidity, but to a lack of market depth. This has important implications as to what policies should be employed to alleviate the current problems