In past economic cycles, the level of the federal funds rate appears to have responded to movements in the rate of inflation as well as to movements in real output and unemployment. The frequent criticism of Fed policies reflects the difficulty of setting the “correct” federal funds rate to achieve these goals. This dual mandate has been often characterized as a balancing act-trying to achieve lower unemployment while maintaining low inflation. Higher interest rates (all other things the same) raise the cost of borrowing and tend to reduce loan and investment activity, whereas lower interest rates (all other things the same) reduce the cost of borrowing and tend to increase loan and investment activity.įederal Reserve monetary policy aims to achieve its statutory goals of low inflation and maximum employment. The cost of these funds then influences the level of interest rates that banks charge customers for loans, as well as the level of other market interest rates. Monetary policy affects the real economy because the level of the federal funds rate sets the opportunity cost for additional funds for banks. Banks are required to hold a minimum level of reserves against their deposits, and banks may borrow reserves to meet those requirements or to make additional loans to customers. The Federal Reserve can directly influence this rate because its transactions with private market banks affect the total supply of bank reserves. The Federal Reserve conducts conventional monetary policy by targeting the federal funds rate, the rate that banks charge each other for overnight loans of their reserves held with the Fed. The model predicts that the unconstrained federal funds rate would have fallen far below the zero lower bound by as much as 5 to 6 percentage points Conventional Monetary Policy Instrument It provides a statistical characterization of the way monetary policy typically responds to changes in the other variables in the model over this period. economy that is estimated using quarterly macroeconomic and financial data from 1959 through 2008. The type of model we employ is a statistical model of the U.S. To address this weakness, the Federal Reserve turned to nonconventional policies, but researchers-and journalists-wonder what the path of the federal funds rate would have been under these circumstances, were it unconstrained by the ZLB. Similarly, real GDP contracted further in 2009. Unemployment increased dramatically from 6.9 percent in 2008:Q4 (on a quarterly average basis) to a peak of 9.9 percent in 2009:Q4. Once the rate arrived at the bound, conventional monetary policy could do no more. The federal funds rate is a nominal interest rate and cannot go below zero, a constraint known as the zero lower bound (ZLB). In response, the Federal Reserve lowered the federal funds rate target to a range of 0 percent to 0.25 percent. In contrast, the financial crisis in the fall of 2008 coincided with the beginning of the sharpest and deepest contraction of the recession. These monetary policy actions, from most vantage points, appeared conventional and relatively comparable to the extent of the economic slowdown to that point. economy showed signs of weakness in 2007, monetary policy actions reduced the federal funds rate by almost 100 basis points over the course of the year, from a high of 5.25 percent to 4.25 percent. We attempt to address this question empirically by employing a particular statistical model.Īs the U.S. Bernanke replied that the answer would depend on the model used and the assumptions made. At the press conference following the April 2012 FOMC meeting, a reporter asked Chairman Bernanke where he thought the federal funds rate would be if it could go below zero.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |