The Federal Reserve Board has the power to manipulate the US money supply through the change of interest rates or by selling off large amounts of credit to member banks. By altering the money supply, the Federal Reserve Board can effectively thwart off recession, or a market contraction.

The Federal Reserve commonly raises and lowers the key interest rates at which it lends money to member banks, or banks that make up the Federal Reserve. Recently, the Federal Reserve lowered interest rates to spur borrowing, increasing the current money supply. Raising the money supply is the most commonly used tactic to offset a market recession or two consecutive quarters of negative GDP growth.

To the markets, the word recession is everything. When word of recession hits Wall Street, the market responds by massive sell offs, wiping off whole percentage points in a matter of minutes. For this reason, it is important to keep economic numbers high and promote GDP growth. 

Gross Domestic Product is equal to consumption + gross investment + government spending + (exports − imports), more simply, all money spent and invested plus all exports. The statistic is based on the dollar, thus an increase in money supply will bring up GDP.

To thwart off the risk of recession, the Federal Reserve Board acted to sell $60 Billion dollars in new credit in January and February. This added $120Billion to the money supply and sent Gross Domestic Product numbers back up, ending the recession by definition. By lowering interest rates, the Federal Reserve hopes to spur borrowing and further add more credit to the system.

For the time being, the Federal Reserve’s actions have put off an economic recession but the long term economics remain the same. The threat of recession is always here with a serious real estate crunch. As home prices deflate the market shrinks, this recession cannot be put off indefinitely by rate changes and market manipulation, investors must own up to economic nature.