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Monetary policy
Monetary policy
Monetary policy
Monetary policy
Monetary policy
Monetary policy
Monetary policy
Monetary policy
Monetary policy
Monetary policy
Monetary policy
Monetary policy
Monetary policy
Monetary policy
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Monetary policy

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Monetary policy trends and analysis.

Monetary policy trends and analysis.

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  • 1. Monetary Policy Evelyne Ringia December 11, 2013
  • 2. The term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals Congress has mandated two policy goals: maximum sustainable output and employment stable prices, meaning low, stable inflation. These dual policy goals imply moderate long-term interest rates. The Fed works to fulfill its dual mandate primarily by setting a target for a key interest rate, the federal funds rate. It serves as a benchmark for many other shortterm interest rates and consequently broadly influences credit conditions.
  • 3. Federal fund rate: The federal fund rate is “the interest rate at which depository institutions lend reserve balances to other depository institutions overnight”. Historically the Federal Reserve uses this monetary policy to adjust the supply of the bank’s reserves The Federal Reserve stopped using the target rate and started using the Federal Funds range in December 15, 2008 at 1%.Effective December 16, 2008, target rate is reported as a range currently maintained at the range of 0%(Lower limit) & 0.25% (Upper Limit)
  • 4. Federal Funds Target Range In its effort to support the financial market, The Federal Reserve started reducing the federal fund rate in September 2007. By late 2008, it reached a range of 0-0.25%, which is the lowest feasible level. Since then, there was no change for the federal fund rate. The Federal Reserve employed other monetary policy tools in order to keep the economy afloat.
  • 5. A close up look at the federal funds range and target rate from January 2012 to present
  • 6. Taylors rule and Federal Funds range Federal funds rate has been close to the Taylors rule benchmark when the economy was not n recession but the 2007/2008 recession hit the Taylors rule suggests a negative rate but federal Reserve lowered the rate to the lowest feasible level and adapted other monetary poly tools to support the economy.
  • 7. Monetary policy instruments 1. open market operations, 2. reserve requirements 3. the discount rate 4. Interest Rate Paid on Excess Reserve Balances Other emergency instruments are large-scale purchases of longer-term securities, including Treasury securities, federal agency debt, and federal agency mortgage-backed securities
  • 8. Open market operations This consists of buying and selling U.S. government securities on the open market with the aim of aligning the federal funds rate with a publically announced target set by the FOMC Reserve Requirements By law, all depository financial institutions must set aside a percentage of their deposits as reserves to be held either as cash on hand or as account balances at a Reserve Bank. Altering reserve requirements is potentially a monetary policy tool, but is rarely used
  • 9. Discount rates The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility the discount window. The Fed uses communication strategy to assure the public that these rates will be held at close to zero until sustainable economic improvements can be seen.
  • 10. Interest Rate Paid on Excess Reserve Balances The interest rate paid on balances maintained to satisfy reserve balance requirements is determined by the Board and is intended to eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions. The interest rate paid on excess balances is also determined by the Board and gives the Federal Reserve an additional tool for the conduct of monetary policy. Currently there are speculation that the Fed may lower this rate to negative in order to encourage banks to lend more (Wall Street Journal)
  • 11. Communication strategy The Fed took steps to reinforce public understanding of their inflation objective to prevent the development of deflationary expectations, they provided guidance on the possible future course of their policy interest rate using communication to the public. The Fed believes the promise known as forward guidance helps to keep the long term borrowing rates down which encourages borrowing, investment and spending. Communication strategy is also considered an easy money policy. The Fed wants to keep its communication to the public simple, clear and consistency.
  • 12. Press releases of FOMC meetings decisions 2008 2009 2011 2012 • economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time • economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period • economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013” • anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5 %, inflation 1&2 years ahead is projected to be no more than 0.5% point above the Committee’s 2% • .October - When the Committee decides to begin to remove policy accommodation, it will take a 2013 2013 balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent • December - Recent labor market results seem to suggest that coming months will show continued labor market improvement,” Federal Reserve Bank of St. Louis President James Bullard said. “Based on labor market data alone, the probability of a reduction in the pace of asset purchases has increased.”
  • 13. Publishing of Fed’s forecasts Another form of forward guidance are the FOMC participants’ projections for coming years. Four times a year, FOMC participants submit their views on the appropriate future path of the federal funds rate, along with associated projections for economic growth, unemployment, and inflation. These projections are published on the Federal Reserve Board’s web site These projections improve public understanding of Fed thinking. In addition to helping people better predict how the Fed reacts to changes in economic conditions, establishing this range of projections reinforces that the future path of policy is determined not by a preset course, but by how economic events unfold
  • 14. There have been Discussions on how to strengthens the message in the Last Feds meeting Some members thought of lowering unemployment target threshold below 6.5% giving people more assurance of the rates staying lower for a long time. Those who opposed the idea proposed to communicate that even after the trimming of the bond buying programs the Fed will maintain the short term interest rate close to zero for the time long enough foe the economy to stabilize.- October minutes

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