Rewriting Monetary Policy 101: What's the Fed's Preferred Post-Crisis Approach to Raising Interest Rates?

Jane E. Ihrig, Ellen Meade and Gretchen Weinbach

Journal of Economic Perspectives, 2015, vol. 29, issue 4, 177-98

Abstract: For many years prior to the global financial crisis, the Federal Open Market Committee set a target for the federal funds rate and achieved that target through small 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 Federal Open Market Committee's target will not work in current circumstances, and explain the approach that the Committee intends to use instead when it decides to begin raising short-term interest rates.

JEL-codes: E43 E52 E58 G01 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/jep.29.4.177
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Citations: View citations in EconPapers (24)

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