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

Author

Listed:
  • 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.))

Abstract

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.

Suggested Citation

  • Ihrig, Jane E. & Meade, Ellen E. & Weinbach, Gretchen C., 2015. "Monetary Policy 101: A Primer on the Fed's Changing Approach to Policy Implementation," Finance and Economics Discussion Series 2015-47, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2015-47
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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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    References listed on IDEAS

    as
    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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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. How the Fed will tighten
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2015-08-10 16:53:34
    2. The Fed's successful tightening
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2017-03-27 17:33:49
    3. Pitfalls of a Reserves-only Narrow Bank
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2018-09-24 12:03:16

    Citations

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    Cited by:

    1. Carlson, Mark & Wheelock, David C., 2018. "Near-money premiums, monetary policy, and the integration of money markets: Lessons from deregulation," Journal of Financial Intermediation, Elsevier, vol. 33(C), pages 16-32.
    2. repec:eee:jebusi:v:91:y:2017:i:c:p:1-15 is not listed on IDEAS
    3. repec:eee:jebusi:v:97:y:2018:i:c:p:28-38 is not listed on IDEAS
    4. Jane E. Ihrig & Ellen E. Meade & Gretchen C. Weinbach, 2015. "Rewriting Monetary Policy 101: What's the Fed's Preferred Post-Crisis Approach to Raising Interest Rates?," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 177-198, Fall.
    5. Kroeger, Alexander & McGowan, John & Sarkar, Asani, 2017. "The pre-crisis monetary policy implementation framework," Staff Reports 809, Federal Reserve Bank of New York, revised 01 May 2018.

    More about this item

    Keywords

    FOMC; Federal Reserve; liftoff; monetary policy implementation; monetary policy normalization; monetary policy tools;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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