The document discusses monetary policy tools used by central banks like the Federal Reserve to influence money supply and credit conditions to promote economic goals of maximum employment, stable prices, and moderate interest rates. It outlines the Fed's dual mandate from Congress, describes various policy tools like open market operations and interest rates, and explains how the Fed uses communication strategies like forward guidance and economic forecasts to provide transparency and influence public expectations.

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