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Monetary Policy 101: A Primer on the Fed's Changing Approach to Policy Implementation

Listed author(s):
  • Ihrig, Jane E.

    ()

    (Board of Governors of the Federal Reserve System (U.S.))

  • Meade, Ellen E.

    ()

    (Board of Governors of the Federal Reserve System (U.S.))

  • Weinbach, Gretchen C.

    ()

    (Board of Governors of the Federal Reserve System (U.S.))

Registered author(s):

    The Federal Reserve conducts monetary policy in order to achieve its statutory mandate of maximum employment, stable prices, and moderate long-term interest rates as prescribed by the Congress and laid out in the Federal Reserve Act. For many years prior to the financial crisis, the FOMC set a target for the federal funds rate and achieved that target through purchases and sales of securities in the open market. In the aftermath of the financial crisis, with a superabundant level of reserve balances in the banking system having been created as a result of the Federal Reserve's large scale asset purchase programs, this approach to implementing monetary policy will no longer work. This paper provides a primer on the Fed's implementation of monetary policy. We use the standard textbook model to illustrate why the approach used by the Federal Reserve before the financial crisis to keep the federal funds rate near the FOMC's target will not work in current circumst ances, and explain the approach that the Committee intends to use instead when it decides to begin raising short-term interest rates.

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    File URL: http://www.federalreserve.gov/econresdata/feds/2015/files/2015047pap.pdf
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    File URL: http://dx.doi.org/10.17016/FEDS.2015.047
    File Function: http://dx.doi.org/10.17016/FEDS.2015.047
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2015-47.

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    Length: 30 pages
    Date of creation: 30 Jun 2015
    Handle: RePEc:fip:fedgfe:2015-47
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    1. Judson, Ruth A. & Klee, Elizabeth, 2010. "Whither the liquidity effect: The impact of Federal Reserve open market operations in recent years," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 713-731, September.
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