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47 posts on "Monetary Policy"

July 16, 2014

Risk Aversion and the Natural Interest Rate

Bianca De Paoli and Pawel Zabczyk

One way to assess the stance of monetary policy is to assert that there is a natural interest rate (NIR), defined as the rate consistent with output being at its potential. Broadly speaking, monetary policy can be seen as expansionary if the policy rate is below the NIR with the gap between the rates measuring the extent of the policy stimulus. Of course, there are many challenges in defining and measuring the NIR, with various factors driving its value over time. A key factor that needs to be considered is the effect of uncertainty and risk aversion on households’ savings decisions. Households’ tolerance for risk tends to be lower during downturns, putting upward pressure on precautionary savings, and thereby downward pressure on the natural interest rate. In addition, uncertainty dictates how much precautionary savings responds to changes in risk aversion. So policymakers need to be aware that rate moves to offset adverse economic conditions that are appropriate in tranquil times may not be sufficient in times of high uncertainty.

Continue reading "Risk Aversion and the Natural Interest Rate" »

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

April 17, 2014

Just Released: The 2013 SOMA Annual Report in a Historical Context

Alyssa Cambron, Michael Fleming, Deborah Leonard, Grant Long, and Julie Remache

In August 2013, we wrote a series of blog posts on the use of the Federal Reserve’s System Open Market Account (SOMA) portfolio in monetary policy operations. Since the onset of the financial crisis, the Federal Open Market Committee (FOMC) has increased the size and adjusted the composition of the SOMA portfolio in efforts to promote the Committee’s mandate to foster maximum employment and price stability. Over time, these actions have also generated high levels of portfolio income, contributing in turn to elevated remittances to the U.S. Treasury. Today’s release of the New York Fed’s report Domestic Open Market Operations during 2013 offers an opportunity to update our blog series’ discussion of the portfolio’s income and unrealized gains and losses, and to revisit our counterfactual exercise exploring how the use of the portfolio to implement monetary policy has affected income.

Continue reading "Just Released: The 2013 SOMA Annual Report in a Historical Context " »

Posted by Blog Author at 12:00 PM in Financial Markets, Monetary Policy | Permalink | Comments (2)

March 05, 2014

Risk Aversion, Global Asset Prices, and Fed Tightening Signals

Jan Groen and Richard Peck

The global sell-off last May of emerging market equities and currencies of countries with high interest rates (“carry-trade” currencies) has been attributed to changes in the outlook for U.S. monetary policy, since the sell-off took place immediately following Chairman Bernanke’s May 22 comments concerning the future of the Fed’s asset purchase programs. In this post, we look back at global asset market developments over the past summer, and measure how changes in global risk aversion affected the values of carry-trade currencies and emerging market equities between May and September of last year. We find that the initial signal of a possible change in U.S. monetary policy coincided with an increase in global risk aversion, which put downward pressure on global asset prices.

Continue reading "Risk Aversion, Global Asset Prices, and Fed Tightening Signals " »

March 03, 2014

How Unconventional Are Large-Scale Asset Purchases?

Carlo Rosa and Andrea Tambalotti

The large-scale asset purchases (LSAPs) undertaken by the Fed starting in late November 2008 are widely considered to be a form of “unconventional” monetary policy. Although these interventions are certainly unprecedented, this post shows that their effect on financial conditions is not that unconventional, in the sense that the relative effects of the LSAPs on returns across broad asset classes—nominal and real government bonds, stocks, and foreign exchange—are quite similar to those of more conventional policies, such as a reduction in the federal funds rate (FFR).

Continue reading "How Unconventional Are Large-Scale Asset Purchases?" »

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

December 09, 2013

Who’s Borrowing in the Fed Funds Market?

Gara Afonso, Alex Entz, and Eric LeSueur

The federal funds market plays an important role in the implementation of monetary policy. In our previous post, we examine the lending side of the fed funds market and the decline in total fed funds volume since the onset of the financial crisis. In today’s post, we discuss the borrowing side of this market and the interesting role played by foreign banks.


Continue reading "Who’s Borrowing in the Fed Funds Market?" »

December 05, 2013

Introducing the FRBNY Survey of Consumer Expectations: Labor Market Expectations

Olivier Armantier, Giorgio Topa, Wilbert van der Klaauw, and Basit Zafar

Note: We aren’t releasing the underlying data yet, but we’ll be making them available to the public sometime in first-quarter 2014. So please stay tuned.

In the previous two blog postings in this series, we described the goals, structure, and content of the new FRBNY Survey of Consumer Expectations (SCE) and presented some findings regarding inflation expectations. In this third posting, we focus on the labor market component of the SCE.

Continue reading "Introducing the FRBNY Survey of Consumer Expectations: Labor Market Expectations" »

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

December 04, 2013

Introducing the FRBNY Survey of Consumer Expectations: Measuring Price Inflation Expectations

Olivier Armantier, Giorgio Topa, Wilbert van der Klaauw, and Basit Zafar

Note: We aren’t releasing the underlying data yet, but we’ll be making them available to the public sometime in first-quarter 2014. So please stay tuned.

In this second of a series of four blog postings, we discuss the data on inflation expectations collected in our new FRBNY Survey of Consumer Expectations (SCE). Inflation expectations are a key consideration for monetary policy as they are believed to influence consumer behavior, thereby affecting economic activity and actual inflation. The SCE data on inflation expectations represent a major innovation as they contain information not previously collected from consumers on a regular basis. In this post, we provide some background on the survey and present some initial findings.

Continue reading "Introducing the FRBNY Survey of Consumer Expectations: Measuring Price Inflation Expectations" »

Posted by Blog Author at 7:05 AM in Household Finance, Monetary Policy | Permalink | Comments (0)

December 02, 2013

Who’s Lending in the Fed Funds Market?

Gara Afonso, Alex Entz, and Eric LeSueur

The fed funds market is important to the framework and implementation of U.S. monetary policy. The Federal Open Market Committee sets a target level or range for the fed funds rate and directs the Trading Desk of the New York Fed to create “conditions in reserve markets” that will encourage fed funds to trade at the target level. In this post, we use various publicly available data sources to estimate the size and composition of fed funds lending activity. We find that the fed funds market has shrunk considerably since the financial crisis and that lending activity is now dominated by one group of market participants.


Continue reading "Who’s Lending in the Fed Funds Market?" »

November 27, 2013

Has the Fed Stabilized the Price Level?

Marc P. Giannoni and Hannah Herman

The Federal Reserve Reform Act of 1977 established the monetary policy objectives of maximum employment, stable prices, and moderate long-term interest rates. The goal of “stable prices” has long been understood to mean a low positive inflation rate. On January 25, 2012, the Federal Open Market Committee (FOMC) explicitly defined its price stability mandate in terms of a longer-run goal of 2 percent inflation measured by the total personal consumption expenditure (PCE) deflator. Here, we examine how the behavior of inflation over different time periods compares to this goal. We then discuss how the goal of stabilizing inflation over the long run, rather than on a year-after-year basis, tends to imply a stabilization of the U.S. price level around a trend line—an outcome similar to that from price-level targeting, which offers various theoretical benefits.

Continue reading "Has the Fed Stabilized the Price Level?" »

Posted by Blog Author at 7:00 AM in Macroecon, Monetary Policy | Permalink | Comments (1)

November 25, 2013

A Way With Words: The Economics of the Fed’s Press Conference

Fernando Duarte and Carlo Rosa

When central bankers speak, traders, journalists, and politicians listen with bated breath. The marked asset price reaction to Chairman Bernanke’s June press conference confirms the importance of his comments in the marketplace.

Continue reading "A Way With Words: The Economics of the Fed’s Press Conference" »

Posted by Blog Author at 7:00 AM in Financial Markets, Monetary Policy | Permalink | Comments (1)
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