During the financial crisis of 2007-2009, what hindered the Fed from reaching their target federal funds rate?

The correct answer highlights the fundamental issue of liquidity in the interbank lending market during the financial crisis of 2007-2009. The loss of liquidity meant that banks were unwilling or unable to lend to each other, even at lower interest rates. This situation created a stark disconnect between the Fed's target for the federal funds rate and the actual rate, as banks hoarded cash due to uncertainty about the financial system’s stability and the creditworthiness of other institutions.

Typically, the Federal Reserve uses open market operations to influence the availability of money and the level of interest rates, including the federal funds rate. However, when liquidity is severely constrained, even significant interventions by the Fed do not guarantee that the target rate will be achieved. Banks may choose to hold onto their reserves rather than lend them out, leading to a non-responsive interest rate environment.

In contrast, the number of bank failures, while significant and a contributing factor to the crisis, did not directly alter the mechanics of how the federal funds rate is set. The federal government stimulus package worked to alleviate some financial strains, but its effects on the interbank lending market were not immediate or sufficient to restore liquidity. Instability in the stock market could create uncertainty and affect investor sentiment, but it