Households responded to this change in their balance sheets by forgoing consumption, which led in turn to a fall in output and employment,3 and put downward pressure on the price level. The FOMC reacted by lowering its target interest rate from 5.25 percent in August 2007 to a range of 0 to 0.25 percent in December 2008; it now remains at this lower bound.
Since  3  4  See Kocherlakota (2010) for a more extensive discussion of the relevant transmission mechanisms. BIS central bankers’ speeches  inflation expectations remained stable, the FOMC’s action has had the effect of lowering the real interest rate facing households. Households, of course, typically respond to lower rates by saving less and demanding more consumption. Similarly, firms undertake more investment projects.