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

Jane E. Ihrig, Ellen Meade and Gretchen Weinbach
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Jane E. Ihrig: https://www.federalreserve.gov/econres/jane-e-ihrig.htm

No 2015-47, Finance and Economics Discussion Series from 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.

Keywords: FOMC; Federal Reserve; liftoff; monetary policy implementation; monetary policy normalization; monetary policy tools (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2015-06-30
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (15)

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http://dx.doi.org/10.17016/FEDS.2015.047 http://dx.doi.org/10.17016/FEDS.2015.047 (application/pdf)

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