This adverse feedback loop between financial conditions and the economy has been a prominent feature of the recession. The Federal Reserve took a two-pronged approach to countering the effects of financial stringency on the economy: We used our conventional policy tools, and we initiated a range of unconventional policy actions to support the extension of credit.
In the first category, we cut the federal funds rate target and did so aggressively after the economy began to weaken substantially in late 2007. By December of last year, we had reduced the target to a range of 0 to 1/4 percent.