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138 posts on "Monetary Policy"

August 08, 2018

How Do the Fed’s MBS Holdings Affect the Economy?



LSE_How Do the Fed’s MBS Holdings Affect the Economy?

In our previous post, we discussed the meaning of the term “credit allocation” and how it relates to the Federal Reserve’s holdings of agency mortgage-backed securities (MBS). We concluded that the Fed’s MBS holdings do not pose significant credit risk but that the Fed does influence the relative market price of credit when it purchases agency MBS, and this indirectly influences decisions by investors. Today, we take the next step and discuss how the Fed’s MBS purchases affect the U.S. economy and, in particular, how the effect of MBS purchases can differ from the effect of purchases of Treasury securities.

Continue reading "How Do the Fed’s MBS Holdings Affect the Economy?" »

Posted by Blog Author at 7:00 AM in Bank Capital, Federal Reserve, Monetary Policy | Permalink | Comments (0)

August 06, 2018

How Do the Fed's MBS Purchases Affect Credit Allocation?



LSE_How Do the Fed's MBS Purchases Affect Credit Allocation?

It is sometimes said that the Federal Reserve should not engage in “credit allocation.” But what does credit allocation actually mean? And how do current Fed policies affect the allocation of credit? In this post, we describe two separate ideas often associated with credit allocation. The first idea is that the Fed should not take credit risk, which taxpayers would ultimately have to bear. The second idea is that the Fed’s actions should not influence the flow of credit to particular sectors. We consider whether the Fed’s holdings of agency mortgage-backed securities (MBS) could affect the allocation of credit. In a companion post, we discuss how the economic effects of the Fed’s MBS holdings compare with the economic effects of more traditional holdings.

Continue reading "How Do the Fed's MBS Purchases Affect Credit Allocation?" »

Posted by Blog Author at 7:00 AM in Central Bank, Federal Reserve, Monetary Policy | Permalink | Comments (0)

July 11, 2018

Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics



LSE_2018_Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics

As a consequence of the Federal Reserve’s large-scale asset purchases from 2008-14, banks’ reserve balances at the Fed have increased dramatically, rising from $10 billion in March 2008 to more than $2 trillion currently. In that new environment of abundant reserves, the FOMC put in place a framework for controlling the fed funds rate, using the interest rate that it offered to banks and a different, lower interest rate that it offered to non-banks (and banks). Now that the Fed has begun to gradually reduce its asset holdings, aggregate reserves are shrinking as well, and an important question becomes: How does a change in the level of aggregate reserves affect trading in the fed funds market? In our recent paper, we show that the answer depends not just on the aggregate size of reserve balances, as is sometimes assumed, but also on how reserves are distributed among banks. In particular, we show that a measure of the typical trade in the market known as the effective fed funds rate (EFFR) could rise above the rate paid on banks’ reserve balances if reserves remain heavily concentrated at just a few banks.

Note: This analysis provides insight into how the fed funds market might react to changes in the aggregate level of bank reserves. However, as it does not account for all relevant factors, it should not be construed as an analysis of any specific time period. In particular, our analysis does not incorporate the technical adjustment introduced by the FOMC on June 13 that lowered the interest paid on banks' reserves relative to the top of the target range.

Continue reading "Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics" »

Posted by Blog Author at 7:00 AM in Banks, Central Bank, Fed Funds, Monetary Policy | Permalink | Comments (0)

June 01, 2018

Hey, Economist! Outgoing New York Fed President Bill Dudley on FOMC Preparation and Thinking Like an Economist

LSE_2018.06.01-LSE-Dudley_920x576

Bill Dudley will soon turn over the keys to the vault—so to speak. But before his tenure ends after nine years as president of the New York Fed, Liberty Street Economics sought to capture his parting reflections on economic research, FOMC preparation, and leadership. Publications editor Trevor Delaney recently caught up with Dudley. This transcript has been lightly edited.

Continue reading "Hey, Economist! Outgoing New York Fed President Bill Dudley on FOMC Preparation and Thinking Like an Economist" »

Posted by Blog Author at 7:00 AM in Banks, Federal Reserve, Hey, Economist!, Monetary Policy | Permalink | Comments (0)

February 09, 2018

Hey, Economist! What Do Cryptocurrencies Have to Do with Trust?



LSE_Hey, Economist!  What Do Cryptocurrencies Have to Do with Trust?


Bitcoin and other “cryptocurrencies” have been much in the news lately, in part because of their wild gyrations in value. Michael Lee and Antoine Martin, economists in the New York Fed’s Money and Payment Studies function, have been following cryptocurrencies and agreed to answer some questions about digital money.

Continue reading "Hey, Economist! What Do Cryptocurrencies Have to Do with Trust?" »

February 07, 2018

A DSGE Perspective on Safety, Liquidity, and Low Interest Rates



Third of three posts
LSE_A DSGE Perspective on Safety, Liquidity, and Low Interest Rates

The preceding two posts in this series documented that interest rates on safe and liquid assets, such as U.S. Treasury securities, have declined significantly in the past twenty years. Of course, short-term interest rates in the United States are under the control of the Federal Reserve, at least in nominal terms. So it is legitimate to ask, To what extent is this decline driven by the Federal Reserve’s interest rate policy? This post addresses this question by coupling the results presented in the previous post with those obtained from an estimated dynamic stochastic general equilibrium (DSGE) model.

Continue reading "A DSGE Perspective on Safety, Liquidity, and Low Interest Rates" »

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

February 06, 2018

A Time-Series Perspective on Safety, Liquidity, and Low Interest Rates



Second of three posts
LSE_A Time-Series Perspective on Safety, Liquidity, and Low Interest Rates

The previous post in this series discussed several possible explanations for the trend decline in U.S. real interest rates since the late 1990s. We noted that while interest rates have generally come down over the past two decades, this decline has been more pronounced for Treasury securities. The conclusion that we draw from this evidence is that the convenience associated with the safety and liquidity embedded in Treasuries is an important driver of the secular (long-term) decline in Treasury yields. In this post and the next, we provide an overview of the two complementary empirical strategies we adopt to extract the trends in real interest rates and quantify their driving factors. Much more detail on all of this can be found in our recently published Brookings paper.

Continue reading "A Time-Series Perspective on Safety, Liquidity, and Low Interest Rates " »

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

February 05, 2018

A New Perspective on Low Interest Rates



First of three posts
LSE_A New Perspective on Low Interest Rates

Interest rates in the United States have remained at historically low levels for many years. This series of posts explores the forces behind the persistence of low rates. We briefly discuss some of the explanations advanced in the academic literature, and propose an alternative hypothesis that centers on the premium associated with safe and liquid assets. Our argument, outlined in a paper we presented at the Brookings Conference on Economic Activity last March, suggests that the increase in this premium since the late 1990s has been a key driver of the decline in the real return on U.S. Treasury securities.

Continue reading "A New Perspective on Low Interest Rates" »

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

January 09, 2018

Fiscal Implications of the Federal Reserve’s Balance Sheet Normalization



LSE_Fiscal Implications of the Federal Reserve’s Balance Sheet Normalization

In the wake of the global financial crisis, the Federal Reserve dramatically increased the size of its balance sheet—from about $900 billion at the end of 2007 to about $4.5 trillion today. At its September 2017 meeting, the Federal Open Market Committee (FOMC) announced that—effective October 2017—it would initiate the balance sheet normalization program described in the June 2017 addendum to the FOMC’s Policy Normalization Principles and Plans.

Continue reading "Fiscal Implications of the Federal Reserve’s Balance Sheet Normalization" »

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

November 30, 2017

How Much Is Priced In? Market Expectations for FOMC Rate Hikes from Different Angles



LSE_2017_ Market Expectations for FOMC Rate Hikes from Different Angles

It is essential for policymakers and financial market participants to understand market expectations for the path of future policy rates because these expectations can have important implications for financial markets and the broader economy. In this post—which is meant to complement prior Liberty Street Economics posts, including Crump et al. (2014a, 2014b ) and Brodsky et al. (2016a, 2016b)—we offer some insights into estimating and interpreting market expectations for increases in the federal funds target range at upcoming meetings of the Federal Open Market Committee (FOMC).

Continue reading "How Much Is Priced In? Market Expectations for FOMC Rate Hikes from Different Angles" »

Posted by Blog Author at 7:00 AM in Expectations, Monetary Policy | Permalink | Comments (0)
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Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.

The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.

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