UNCONVENTIONAL MONETARY POLICY AND ITS CHALLENGES ARIS ZOLETA Introduction Most central banks have inflation or price stability as their nominal goal, with exception of the Fed, which is running with the dual mandate of price stability and full employment. In this article, we shall understand the centrality of central banks in the advancement of capitalism, and its role in ensuring the stability of price and financial systems to achieve its goal of full employment. During normal times a central bank uses short-term interest rates to influence the real economy; when the Fed sees that the economy is running below its full employment, it will lower its funding rate (which is the rate banks charge to each other when borrowing reserve, to influence other interest rates in the market such as student loans, car loans and mortgages). With interest rates charged by banks for their loans now lower, the Fed hopes that this will drive consumption, as credit is now cheap. As the consumption of households increases, aggregate demand in the economy increases as well, accompanied by employment of labour, and other inputs, which will drive the economy to its potential employment. If the economy is overheating, as it has run over its full employment, the Fed will do the reverse. This process may sound simple, but setting the funding rate near Fed’s target is quite complicated. The FOMC (Federal Open Market Committee) has to forecast the reserve that banks need, and supply the banking system with an appropriate level of reserve to achieve the target Fed's funding rate. The supply of reserve expands and contracts through market operation, where the desk at the FOMC will buy and sell US government bonds. When the Fed sees that the reserve in the system is not appropriate, it will contract it by selling US Treasuries, and do the reverse if it sees that banks need more reserve. This is the Fed’s monetary conduct in normal times, but normal times ended during the Great Financial Crisis (GFC). In line with the effort of the most central banks of developed economies, such as the BOJ, ECB and BOE, to support the economy from