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88 posts on "Monetary Policy"

February 04, 2016

How Do Central Bank Balance Sheets Change in Times of Crisis?



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The 2007-09 financial crisis, and the monetary policy response to it, have greatly increased the size of central bank balance sheets around the world. These changes were not always well understood and some were controversial. We discuss these crisis-induced changes, following yesterday’s post on the composition of central bank balance sheets in normal times, and explain the policy intentions behind some of them.


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Posted by Blog Author at 7:00 AM in Monetary Policy | Permalink | Comments (0)

February 03, 2016

What Is the Composition of Central Bank Balance Sheets in Normal Times?



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There has been unusually high activity on central banks’ balance sheets in recent years. This activity, which has expanded beyond the core operations and collateral of the central bank, has been called “unconventional,” “nonstandard,” “nontraditional,” and “active.” But what constitutes a normal central bank balance sheet? How does central bank asset and liability composition vary across countries and how did the crisis change this composition? In this post, we focus on the main characteristics of central bank balance sheets before the crisis. In our next piece, we describe how this composition has changed in response to the crisis.


Continue reading "What Is the Composition of Central Bank Balance Sheets in Normal Times?" »

Posted by Blog Author at 7:00 AM in Monetary Policy | Permalink | Comments (2)

February 02, 2016

Counterparties and Collateral Requirements for Implementing Monetary Policy



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What types of counterparties can borrow from or lend to a central bank, and what kind of collateral must they possess in order to receive a loan? These are two key aspects of a central bank’s monetary policy implementation framework. Since at least the nineteenth century, it has been understood that an important role of central banks is to lend to solvent but illiquid institutions, particularly during a crisis, as this provides liquidity insurance to the financial system. They also provide liquidity to markets during normal times as a means to implement monetary policy. Central banks that rely on scarcity of reserves need to adjust the supply of liquidity in the market, as described in our previous post. In this post, we focus on liquidity provision related to the conduct of monetary policy.

Continue reading "Counterparties and Collateral Requirements for Implementing Monetary Policy" »

Posted by Blog Author at 7:00 AM in Monetary Policy | Permalink | Comments (0)

February 01, 2016

Standard Elements of a Monetary Policy Implementation Framework



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In the minutes of the July 2015 Federal Open Market Committee (FOMC) meeting, the chair indicated that Federal Reserve staff would undertake an extended effort to evaluate potential long-run monetary policy implementation frameworks. But what is a central bank’s monetary policy implementation framework? In a series of four posts, we provide an overview of the key elements that typically constitute such a framework.

Continue reading "Standard Elements of a Monetary Policy Implementation Framework" »

Posted by Blog Author at 7:00 AM in Monetary Policy | Permalink | Comments (0)

December 21, 2015

The Effect of Fed Funds Rate Hikes on Consumer Borrowing Costs



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The target federal funds rate has hovered around zero for nearly a decade, and observers are questioning what effect an increase could have on both the financial markets and the real economy. In this post, we examine the historical reaction of loan rates to target rate increases. Specifically, we examine the interest rates that banks offer on residential mortgages and home equity lines of credit (HELOCs).

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Posted by Blog Author at 7:00 AM in Household Finance, Monetary Policy | Permalink | Comments (0)

December 01, 2015

The FRBNY DSGE Model Forecast—November 2015



This post presents an update of the economic forecasts implied by the Federal Reserve Bank of New York’s (FRBNY) dynamic stochastic general equilibrium (DSGE) model, which we first introduced in a series of blog posts in September 2014. The model continues to predict a gradual recovery in economic activity, but one that will proceed at a slightly slower pace than was forecast in our April update. It also predicts a slow return of inflation toward the Federal Open Market Committee’s (FOMC) long-run target of 2 percent. This forecast remains surrounded by significant uncertainty. Please note that the DSGE model forecasts are not the official New York Fed staff forecasts, but only an input to the overall forecasting process at the Bank.

Continue reading "The FRBNY DSGE Model Forecast—November 2015 " »

Posted by Blog Author at 7:00 AM in Macroecon, Monetary Policy | Permalink | Comments (0)

November 23, 2015

End of the Road? Impact of Interest Rate Changes on the Automobile Market



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The Federal Reserve has kept interest rates at historic lows for the last six years, but eventually rates will return to their long-term averages. That means both policymakers and the public will once again be asking one of the classic questions in monetary economics: What are the impacts of rising interest rates on the real economy? Our recent New York Fed staff report “Interest Rates and the Market for New Light Vehicles,” considers this question for the U.S. market for new cars and light trucks. We find strong evidence that rising rates will dampen activity: Our model predicts that in the short-run a 100-basis-point increase in interest rates will cause light vehicle production to fall at an annual rate of 12 percent and sales to fall at an annual rate of 3.25 percent.


Continue reading "End of the Road? Impact of Interest Rate Changes on the Automobile Market" »

Posted by Blog Author at 7:00 AM in Macroecon, Monetary Policy | Permalink | Comments (3)

November 18, 2015

The Importance of Commodity Prices in Understanding U.S. Import Prices and Inflation



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The dollar rose sharply against both the euro and yen in 2014 and 2015 and non-oil import prices subsequently fell. An explanation for this relationship is that a stronger dollar reduces the dollar-denominated cost of producing something in Germany or Japan, giving firms room to lower their dollar prices in order to gain sales against their U.S. competitors. A breakdown by type of good, however, shows that import prices for autos, consumer goods, and capital goods tend not to move much with changes in the dollar as foreign firms choose to keep the prices of their goods stable in the U.S. market. Instead, the connection between import prices and the dollar largely reflects the tendency for commodity prices to fall in dollar terms when the dollar strengthens. As a consequence, the dampening effect of a stronger dollar on U.S. inflation is transmitted much more through falling commodity prices than through cheaper imported cars and consumer goods.


Continue reading "The Importance of Commodity Prices in Understanding U.S. Import Prices and Inflation" »

Posted by Blog Author at 7:00 AM in International Economics, Macroecon, Monetary Policy | Permalink | Comments (0)

November 16, 2015

Should Monetary Policy Respond to Financial Conditions?



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There’s an ongoing debate about whether policymakers should respond to financial conditions when setting monetary policy. An argument is often made that financial stability concerns are more appropriately dealt with by using regulatory and macroprudential tools. This post offers a theoretical justification for policymakers to monitor and possibly respond to financial conditions not because this would lessen concerns about financial stability but because this information helps reveal the state of the economy and the appropriate stance of monetary policy.

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Posted by Blog Author at 7:00 AM in Financial Markets, Household Finance, Monetary Policy | Permalink | Comments (0)

November 09, 2015

The New Overnight Bank Funding Rate



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The Federal Reserve Bank of New York will begin publishing the overnight bank funding rate (OBFR) sometime in the first few months of 2016. The OBFR will be a broad measure of U.S. dollar funding costs for U.S.-based banks as it will be calculated using both fed funds and Eurodollar transactions, as reported in a new data collection—the FR 2420 Report of Selected Money Market Rates. In a recent post, “The Eurodollar Market in the United States,” we described the Eurodollar activity of U.S.-based banks and compared recent fed funds and Eurodollar rates. Here, we look at the historical relationship between overnight fed funds and Eurodollars and compare the new OBFR rate to the fed funds rate.


Continue reading "The New Overnight Bank Funding Rate" »

Posted by Blog Author at 7:00 AM in Financial Markets, Household Finance, Monetary Policy | Permalink | Comments (2)
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