In several stock market crashes in the US including the recent Covid crash in March and the financial crisis in 2008 it was said that the Feds had to step in and save the economy.

There was an interview few weeks ago where a financial analyst said that we need to test the lows again then for the Feds to step in again so that we regain confidence in the market.

So basically, what are the "Feds"? How does their intervention save the economy? Why did the stock market bounce back when they stepped in? What are the drawbacks of it?

I'm not American nor familiar with the American financial system so if possible please use simple terms in your explanation.

1 Answer 1


It's the Fed (singular), short for the Federal Reserve, the US central bank. The Fed has unlimited ability to lend money and buy and sell securities. It electronically creates the dollars to do this. Normally it uses this power to control the short-term interest rate (which determines how cheaply businesses and consumers can borrow). But especially in a crisis when it has already taken the interest rate to zero, the Fed can take additional steps to stimulate other markets.

The Fed "saves the economy" by ensuring there is plenty of money and demand for financial assets (liquidity). This "monetary stimulus" can mitigate crashes, but it doesn't always do much to spur real economic activity. It works best if combined with "fiscal stimulus", or money paid outright by the US Treasury to businesses and consumers via tax cuts or spending, but fiscal stimulus is harder to enact because it requires cooperation of Congress and the President, whereas the Fed is independent and can act quickly.

The Feds (plural) can refer to the US federal government broadly (though most often to federal law enforcement). Occasionally someone might refer to overall economic policy made by the "Feds" (which could include the Fed along with Congress, the Treasury, the White House, etc.). But the most common usage in finance is talking about the singular Fed.

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