Econintersect: The Federal Reserve has sought to stimulate economic activity since the financial crisis through large-scale asset purchases and forward guidance designed to reduce longer-term interest rates. Nada Mora examines the effects of the Fed’s efforts and finds that since late 2008 banks have been less likely to pass on the full benefit of lower rates to consumers.
by Nada Mora – Economic Review, Federal Reserve Bank of Kansas City
The economic recovery following the financial crisis and Great Recession of 2007-09 has been slow. Research has shown that recessions following banking crises are typically accompanied by large and persistent declines in output. Contributing factors include sharp declines in asset prices, such as housing prices, that damage the balance sheets of both households and financial institutions. These factors, combined often with a buildup of debt during the bubble years prior to a crisis, cause debt deleveraging to be drawn out. Demand for new credit by households is therefore depressed by the effects of reduced income and wealth, and by the debt overhang. Likewise, the supply of new credit from banks is limited by past liquidity and solvency shocks and by banks’ perceptions of higher risk in future lending.