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Let's talk about it: what policy tools should the Fed \\"normally\\" use?

Michelle Barnes

No 14-12, Current Policy Perspectives from Federal Reserve Bank of Boston

Abstract: During the onset of a very severe financial and economic crisis in 2008, the federal funds rate reached the zero lower bound (ZLB). With this primary monetary policy tool therefore rendered ineffective, in November 2008 the Federal Reserve started to use its balance sheet as an alternative policy tool when it began the large-scale asset purchases. Now attention is turning to how the Fed should transition back to a more conventional monetary policy stance. Largely missing from these discussions about the Fed's \\"exit strategy\\" is a consideration that perhaps it should retain, not discard, the balance sheet tools. Since the Dodd-Frank Act (DFA) has added maintaining financial stability to the Fed's existing dual mandate to achieve maximum sustainable employment in the context of price stability, it might be beneficial to have several tools to achieve multiple policy objectives. An additional consideration is that some of these tools may be needed to stem future crises as a result of the DFA's new limitations on how the Fed can provide liquidity under such adverse circumstances. In an effort to spur a broader debate, this brief discusses what is known and knowable regarding the effectiveness of balance sheet tools and examines four primary arguments for keeping these as part of the Fed's toolkit.

JEL-codes: E58 E52 G12 G01 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2014-12-29
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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