The Federal Reserve had a major challenge on September 11, 2001 as the attacks by terrorist on Washington, Pennsylvania and New York were disruptive on the U.S. financial markets. The Federal Reserve immediately issued a short statement (FRB, 2001) “The Federal Reserve System is open and operating. The discount window is available to meet liquidity needs.” The results, the Federal Reserve lowered interest rates and loaned more that $45 billion to financial institutions in order to provide stability to the U.S. economy. Within a little over a week, the Federal Reserve lending had returned the financial markets to pre-9/11 levels and a liquidity scare had been averted (History of the Federal Reserve, 2013).
The Effects of September 11th
In the weeks following the attacks consumer spending dropped sharply with the exception of items purchased in-relation-to preparation for possible additional attacks. Items with increase in sales were: groceries, security devices, bottled water and purchases of insurance. The weakness in customer spending, falling stock prices and higher unemployment was rising before the attacks (Figure 1) and the attack itself may have been the overall objective to cause further economic hardships. Unemployment continued to rise since September 11; October’s u...
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...ulate the economy by reducing borrowing costs. Home mortgages went down almost immediately to stimulate mortgage refinancing, which might have stimulated the start of the housing bubble that was inflated until 2007. The Federal Reserve acted immediately to the threats of the attacks that threaten liquidity in banking industry. The short term of additional liquidity by the Federal Reserve warded off a spill over into the economy, the longer liquidity circulates in the financial system, the more it may fuel inflation. The liquidity effects of the terrorist attacks on September 11 had been rather limited, short term. All research had verified that the actions taken by the Federal Reserve was the right recipe to prevent a potential financial crisis’s with no arguments against, our conclusion is that the Federal Reserve did what they are chartered to do and did it well.
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