Essay: Effects of Steps Taken by Federal Reserve on Financial Markets

Sample Essay

The steps taken by the U.S Federal Reserve and Treasury have affected the financial markets in various ways. First we look at the Federal Reserve policy to buy commercial paper with a term of three months; this policy was aimed at providing short term liquidity to the market. The market worsened during the financial crisis in September but the commercial paper market has shown improvements after the implementation of this policy as the spreads of rates and risk have declined and the maturity has increased.

The asset backed securities program which is the joint initiative of the Federal Reserve and Treasury which is meant for long term loans with the terms of three years will show signs of improvement in the near future as the impact of these loans has yet to come as the program will help decrease the rates and increase the opportunity for consumers, small business loans and private lending. The plan of the Federal Reserve to buy $100 billion and $500 billion in Government sponsored enterprise debt and mortgage backed securities over a period of time has helped lower the mortgage rates which are declining further which would support the housing sector in the time to come.  The policies of the Federal Reserve help in lowering the interest rates and ease the credit crunch in various markets (Bernanke).

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