What are the ripple effects of an FOMC decision to fight recession?

A recessionary phase is characterized by a low level of aggregate demand and hence, low economic activity due to lack of confidence. The Federal Reserve adopts an expansionary monetary policy to rescue the economy out of recession.

The most widely used monetary policy instrument for expansionary motive is the purchase of bonds and securities in the open market by FOMC.

When FOMC purchases the government securities from financial institutions, it deposits payments into the account of buyers.

This leads to an increase in the supply of loanable funds which increases the credit creation capacity of banks, allowing them to extend more loans with greater fluidity.

Financial institutions and banks decrease their short-term interest rates which leads to a decrease in the cost of borrowing for firms and households.

Investments become lucrative for firms and consumption becomes lucrative for households. As firms invest via credit financing, the unemployed workforce is absorbed.

Collectively, there is an increase in the spending capacity of consumers which leads to an increase in aggregate demand and shifts the demand curve to the right to push the economy out of the recession.