Question

Are there conflicts arising between the Fed’s responsibility for normal monetary policy operations and the need to operate a government safety net to deal with severe systemic crises?

Answer 1

Yes, there are conflicts between the Fed’s responsibility for normal monetary policy operations and the need to operate a government safety net to deal with severe systemic crises.

This is because during situations of severe systematic crises recession will be the underlying element or factor. In such a situation QE (or quantitative easing) will work only if it induces the private sector to spend more out of their current income. Fed has the added responsibility to ensure safety and soundness of the financial system and for this Fed uses margin requirements and other means to prevent financial institutions from fueling speculative bubbles.