exposed to the risk of persistent deterioration in labor incomes. more businesses see themselves as being exposed to the risk of a radical and persistent downshift in the demand for their products. these workers and businesses have an incentive to accumulate more safe assets as a way to self - insure against this enhanced macroeconomic risk. the federal fiscal situation is the third key source of elevated uncertainty. the federal government faces a long - run disconnect between its overt commitments and the baseline path of federal tax collections. this disconnect can only be resolved by raising taxes and / or cutting the long - run arc of spending. of course, this tension between revenues and expenditures predated the 2007 downturn. however, it is at least arguable that the fiscal debates of the past few years have made more americans aware of the uncertainties associated with resolving this long - run disconnect. and these uncertainties affect the demand for safe assets. the possibility of higher future taxes on corporate profits gives businesses an incentive to demand safe short - term financial assets as opposed to engaging in long - term investments. the prospect of reductions in medicare, medicaid or social security gives some households an incentive to demand more safe assets as a way of replacing those lost potential benefits. i ’ ve argued that, due in part to tighter credit access and higher uncertainty, the demand for safe financial assets has risen since 2007. at the same time, the global supply of assets perceived as safe has also fallen. americans – and many others around the world – thought in 2007 that it was highly unlikely that american residential land, and assets backed by land, could ever fall in value by 30 percent. not anymore. similarly, investors around the world viewed all forms of european sovereign debt as a safe investment. not anymore. thus, the fomc is confronted with a greater demand for safe assets and tighter supply of safe assets than in 2007. these changes in asset markets mean that, at any given level of real interest rates, households and businesses spend less. their decline in spending pushes down on both prices and employment. as a result, the fomc has to lower the real interest rate to achieve its objectives. 2 i often hear that the fomc has created a low interest rate environment that is harmful for savers and others. in my view, like savers, the fomc is being forced to make unusual decisions by an unusual economic environment that is not of its own making. the fom

by saying that the federal reserve views inflation as being “ mandate - consistent ” if it is running at “ 2 percent or a bit under ”. congress has also mandated that the fomc set monetary policy so as to promote maximum employment. an important and ongoing communications challenge for the fomc is that it is much harder to quantify the maximum employment mandate than the price stability mandate. changes in minimum wage policy, demography, taxes and regulations, technological productivity, job market efficiency, unemployment insurance benefits, entrepreneurial credit access and social norms all influence what we might consider “ maximum employment ”. trying to offset these changes in the economy with monetary policy can lead to a dangerous drift in inflationary expectations and ultimately in inflation itself. looking back over the past four years : actions the national bureau of economic research ’ s business cycle dating committee serves as the official arbiter of precisely when recessions begin and end in the united states. 1 the committee has determined that what is commonly referred to as the great recession began in december 2007 and ended in june 2009. during that time period, real gross domestic product ( that is, gdp adjusted for inflation ) fell by 5 percent and unemployment nearly doubled. the federal reserve responded to the great recession and the associated financial crisis in a number of ways that fall roughly into two classes. first, the fed engaged in a vast amount of lending to firms believed to be in sound condition. it lent through conventional vehicles like the discount window and currency swaps with foreign central banks. but it also lent through relatively unconventional vehicles like the term asset - backed securities loan facility. 2 second, the fed lowered the real interest rate facing borrowers and lenders. here, i should clarify some terminology. by the term “ real interest rate ”, i ’ m referring to the interest rate received by lenders net of inflation. thus, if the interest rate on the loan is 5 percent per year and lenders expect inflation to be around 2 percent, the real interest rate see national bureau of economic research ’ s business cycle dating committee. see willardson ( 2008 ) and willardson and pederson ( 2010 ). bis central bankers ’ speeches is roughly 3 percent. economists generally think that it ’ s the real interest rate that matters for economic decision - making. i ’ ll first discuss the fed ’ s lending responses and then talk about the interest rate cuts. lending to understand the fed ’ s lending response to the events of 2007 – 09, we need to step