In addition to the Federal Reserve's emergency lending programs, the monetary policy actions taken during this time were deemed extraordinary. We swiftly lowered the target range for the federal funds rate to close to zero — the effective lower bound— and made an open-ended commitment to purchasing securities. It was only the second time that the Fed had taken such dramatic steps. But the first time for these actions was scarcely a decade ago, and there is good reason to think such a response may not be extraordinary anymore. Structural changes in the economy have tended to lower interest rates and limit the room that the Federal Reserve will have to cut rates during a slowdown.2 I hope we never have another two years like 2020 and 2021, but because of the low-interest-rate environment we now face, I believe that even in a typical recession there is a decent chance that we will be considering policy decisions in the future similar to those we made over the past two years. Because of that likelihood, it is especially useful to consider the lessons learned.

Let's start at the beginning, when the United States was faced with the economic shock from COVID-19. Over several weeks starting in early March 2020, the FOMC lowered the target range for the federal funds rate to the effective lower bound and began purchasing Treasuries and agency mortgage-backed securities (MBS). Meanwhile, the Fed established numerous liquidity and credit market facilities.3 All these actions were taken to support liquidity in the financial system and keep credit flowing to households, businesses and state and local governments. Asset purchases were undertaken in response to disruptions in financial markets, particularly in the normally stable U.S. Treasury market. Besides supporting smooth market functioning, asset purchases also aided in the transmission of monetary policy to broader financial conditions.

Financial markets stabilized relatively quickly. Over the course of 2020, the Fed's liquidity and credit facilities saw reduced demand and most of the emergency programs were decommissioned around year end. Perhaps the most straightforward takeaway for monetary policy is that in times of severe stress, lending facilities, along with sharp cuts to the federal funds rate and the introduction of large-scale asset purchases, are very effective in reviving the economy.

There are some other lessons, I think, from the experience of tightening monetary policy, a process which was put in motion by the guidance that the FOMC issued in 2020 about how long it would keep the federal funds rate at the effective lower bound and continue asset purchases. In September and December of 2020, the FOMC provided criteria or conditions in the meeting statement that would need to be met before the FOMC would consider raising interest rates and begin to reduce asset purchases, respectively. These conditions were, in effect, the FOMC's plan for starting the process of tightening policy. This guidance was short term, specific to the task of when to tighten policy in this current cycle, and focused on specific tools.

Let me make an important distinction here. A bit earlier, in August 2020, the Committee completed a multi-year review of our overall strategy for achieving and sustaining our economic goals. The strategy statement is very different than the tightening guidance — it is about longer-run goals, not specific actions related to the current circumstances. The goals in the strategy statement apply in all economic circumstances and don't include any details on the settings of policy tools. I mention this distinction because some have argued that the FOMC's new strategy was a factor that led the Committee to wait too long to begin tightening monetary policy. A bit later, I will explain why I do not believe this is the case, and I will explain how the guidance for tightening policy, laid out in the FOMC's post-meeting statements, was the basis for our decisions.