Central banks play a crucial role in helping economies during tough times. They use different tools to keep everything running smoothly. The main goals when there’s an economic crisis are to keep the financial system stable, boost economic growth, and manage inflation.

Let’s break down some of these tools:

1. Interest Rate Changes:

   • Central banks can lower interest rates to make it cheaper for people and businesses to borrow money.
   • For example, during the financial crisis in 2008, the Federal Reserve lowered the federal funds rate from 5.25% to almost 0% by December 2008.
   • When interest rates are lower, it costs less to take out loans, which encourages more spending and investment.

2. Quantitative Easing (QE):

   • Sometimes, when interest rates are already low, central banks buy government bonds to add more money to the economy.
   • In 2020, during the early days of the COVID-19 pandemic, the U.S. Federal Reserve bought over $2 trillion worth of assets to help improve the money supply.

3. Forward Guidance:

   • Central banks share information about what they plan to do with monetary policy in the future. This helps people and businesses know what to expect.
   • For instance, in March 2020, the Federal Reserve announced it would keep interest rates close to zero until at least 2022. This gave markets some certainty.

4. Emergency Lending Programs:

   • In tough times, central banks set up special lending programs to assist certain industries.
   • In response to COVID-19, the Fed created several programs, like the Paycheck Protection Program Liquidity Facility, to help small businesses get access to money.

By using these tools, central banks can help lessen the negative impacts of economic crises and encourage recovery.