Remarks on Unconventional Monetary Policy

Figure 1 displays the facts that motivate this discussion. Interest rate spreads increased somewhat at the start of the 2007 recession and then widened substantially after August 2008. The Federal Reserve initiated a program of unconventional monetary policy in the fall of 2007, by purchasing privately issued assets and by permitting banks to use privately issued assets as collateral at the discount window. The Federal Reserve’s program of unconventional monetary policy accelerated considerably in March 2009. At roughly the same time, interest rate spreads—initially the commercial paper spreads and then corporate spreads—returned to normal. Moreover, asset prices and economic activity began to bounce back from their plunge since late 2007 (see figures 1B and C). These observations raise the following questions: