By Jeremiah Chessie and Will Cooke

In the 21st century, the United States experienced two major recessions. In 2007-2008, the U.S. housing market collapsed, leading to an economic downturn known as the Great Recession. In both recessions, the Fed slashed interest rates to near zero and launched large-scale asset purchases in Treasury securities and mortgage-backed securities to stabilize financial markets. In the United States, schools transitioned to online teaching, businesses shut down, and states imposed lockdowns, all happening within weeks. Shocks in supply chains around the world and reduced overall output, with people moving indoors, resulted in a sudden recession.

In November 2008, the Federal Reserve began taking part in a monetary policy action known as quantitative easing. As part of quantitative easing, the Fed purchased $600 billion in mortgage-backed securities from commercial banks. The excess liquidity that banks now had put downward pressure on the Federal Funds Rate (borrowing rates between banks). This action shifted the Fed’s overall balance sheet, increasing bank debt, mortgage-backed securities, and Treasury notes. By June 2010, the Fed had reached a peak of 2.1 trillion in assets. In November 2010, the Fed announced it would buy an additional $600 billion in Treasury securities. Marc Labonte (2021) discusses the Federal Reserve’s response to COVID-19. He mentions how the Fed again implemented quantitative easing, but this time, their purchases were much larger. In April of 2020 alone, the Fed’s securities holdings increased by $1.2 trillion. This was possible through the Fed expanding its balance sheet, surpassing $4.5 trillion by March 2020 and exceeding $7 trillion by May 2020.

Examining the Federal Reserve’s monetary policy during the COVID-19 Recession and the Great Recession shows the differing effects they had on reviving the American economy. During the COVID Recession, the Fed lowered interest rates to near zero immediately after market disruptions in March 2020, while it took the Fed until the end of 2008 to slowly lower interest rates. In 2008, the Federal Reserve reacted cautiously and learned lessons the hard way, but in 2020, the Fed reacted immediately, using the tools it had built during the Great Recession.

Data Analysis

To show the difference between the Fed’s response during the Great Recession and the COVID-19 pandemic, we looked at the total assets of the Federal Reserve and the Treasury constant maturity yield. Both data were obtained through the Board of Governors of the Federal Reserve System. Figure 1 shows the total assets of the Federal Reserve over the period January 2005 through December 2022. This period covers both the Great Recession of 2008, as well as the COVID-19 pandemic, and the periods of quantitative easing during these events are indicated by the shaded regions. As the graph illustrates, during both recessions, there was a steep increase in the assets of the Federal Reserve. The Fed’s overall balance sheet expanded, and, during the COVID-19 pandemic, the Federal Reserve increased its assets at a much quicker rate and by a much larger amount.

Figure 2 shows the yield of the monthly Treasury constant maturities from December 2005 through December 2022. The Treasury constant maturity rate is the interest rate on U.S. Treasury securities, which helps to show how borrowing costs change over time. As the graph shows, during the Great Recession, market yields declined gradually as economic conditions worsened, and the Federal Reserve responded by lowering interest rates in a cautious, step-by-step manner. Compared to the gradual decline in yields during the Great Recession, yields during the COVID-19 pandemic collapsed at a much faster rate, and the Fed responded by immediately cutting interest rates to near zero. Also, the market had a much faster recovery compared to after the Great Recession. Together, these two graphs show how the Federal Reserve responded much more rapidly and at a higher intensity during the COVID-19 pandemic than it did during the Great Recession.

Figure 1

Sources: The Board of Governors of the Federal Reserve System

Figure 2

Sources: The Board of Governors of the Federal Reserve System

Conclusion

The Federal Reserve’s responses to the Great Recession and the COVID-19 Recession highlight the evolution of its growing willingness to act decisively in times of crisis. While the Federal Reserve approached the 2008 collapse cautiously, learning important lessons about the power of rapid intervention, it applied those lessons in 2020 by acting swiftly and on a much larger scale. The goal of the Federal Reserve is to stabilize financial markets, and in pursuit of that goal, the Federal Reserve implemented quantitative easing. Comparing these two periods shows that a proactive and flexible central bank can significantly influence the speed and strength of an economic recovery. In the future, it is promising to see that the Federal Reserve adapted and changed its response to the recession based on previous recessions. Policymakers should be prepared for faster and more aggressive interventions in future crises and draw upon what they have learned in the past.

References

1. Board of Governors of the Federal Reserve System. Balance Sheet Trends – Accessible. Federal Reserve, 25 Apr. 2025, https://www.federalreserve.gov/monetarypolicy/bst_recenttrends_accessible.htm.

2. Board of Governors of the Federal Reserve System. Selected Interest Rates (Daily) – H.15. Federal Reserve, 25 Apr. 2025, www.federalreserve.gov/releases/h15/.

3. “The Federal Reserve’s Response to COVID-19: Policy Issues.” Yale Program on Financial Stability, 30 Apr. 2020, https://elischolar.library.yale.edu/ypfs-documents2/200/.

4. Labonte, Marc, Liang, Nellie, et al. “What Did the Fed Do in Response to the COVID-19 Crisis?” Brookings, 23 Jan. 2024, www.brookings.edu/articles/fed-response-to covid19/#:~:text=Easing%20Monetary%20Policy,of%200%25%20to%200.25%25.

5. “Quantitative Easing Timeline: What Is Quantitative Easing?” Public Service Commission of Kentucky, 6 Apr. 2015, https://psc.ky.gov/pscecf/2014-00371/mkurtz%40bkllawfirm.com/04062015050241/Quantitative_Easing_Timeline___What_Is_Quantitative_Easing_.pdf.