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The pre-crisis monetary policy implementation framework

Author

Listed:
  • Alexander Kroeger
  • John McGowan
  • Asani Sarkar

Abstract

This article describes the Federal Reserve?s (?the Fed?s?) operating framework for monetary policy prior to the expansion of the Fed?s balance sheet during the financial crisis. To implement the Fed?s mandate of promoting price stability consistent with full employment, the Federal Open Market Committee (FOMC) sets a target for the overnight rate in the federal funds market, where banks trade reserve balances. In the pre-crisis framework, aggregate reserves were scarce, so relatively small changes in the level of reserves would affect rates in the fed funds market. The Federal Reserve Bank of New York?s Open Market Trading Desk (?the Desk?) forecasted the demand for and supply of reserves on a daily basis, and then conducted repo operations with primary dealers with the objective of supplying enough reserves to maintain the equilibrium rate close to its target. The Desk was successful in achieving this objective, since the fed funds rate generally did remain close to its target, and any deviations were quickly corrected. However, the pre-crisis operating procedures deployed by the Desk were more complex and opaque than alternative operating frameworks, required substantial intraday overdrafts from the Fed to meet banks? short-term payment needs, and had to be abandoned once the Fed?s balance sheet expanded in response to the financial crisis. Since the crisis, the Desk has successfully controlled the policy rate using a new framework, suggesting that effective monetary control may be achieved through different frameworks.

Suggested Citation

  • Alexander Kroeger & John McGowan & Asani Sarkar, 2018. "The pre-crisis monetary policy implementation framework," Economic Policy Review, Federal Reserve Bank of New York, issue 24-2, pages 38-70.
  • Handle: RePEc:fip:fednep:00049
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    References listed on IDEAS

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    Cited by:

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    2. Ricardo Correa & Wenxin Du & Gordon Y. Liao, 2020. "U.S. Banks and Global Liquidity," NBER Working Papers 27491, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Fed; monetary policy framework: pre-crisis;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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