Fed policy in the financial crisis: arresting the adverse feedback loop

An adverse feedback loop takes hold when a weakening financial system and a slowing economy feed off each other. A crisis or shock curtails lending, hobbling the real economy; the more production and employment falter, the more lending contracts. ; Arresting the adverse feedback loop could prove to be the seminal challenge of early 21st century monetary policymaking. Since sounding the alarm in January 2008, the Fed has taken a series of actions--many unprecedented--to prevent additional damage to financial markets and restore lending activity. These policies have had some success in loosening the grip of the adverse feedback loop and may have finally positioned the economy for growth. Still, doubts linger. The risk remains that the actions may prove insufficient to put the economy on a clear path to rising employment and stable prices.