During a recession with low inflation, what action is the Federal Reserve likely to take?

In a recession characterized by low inflation, the Federal Reserve typically aims to stimulate economic activity to encourage growth and prevent a deeper economic downturn. One effective way to achieve this is through open market operations, specifically by purchasing bonds.

When the Federal Reserve buys bonds in the open market, it injects liquidity into the banking system. This action increases the reserves of commercial banks, which in turn allows them to lend more money to consumers and businesses. With more funds available for lending, interest rates tend to decrease, making borrowing cheaper. This lower cost of borrowing encourages spending and investment, which can help spur economic growth and reduce unemployment during a recession.

In contrast, selling bonds or increasing interest rates would have a contractionary effect on the economy, reducing the available money supply and discouraging spending and investment. Therefore, in the context of a recession with low inflation, buying bonds aligns with the Federal Reserve's goal of promoting economic recovery.