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Liberty Street Economics
157 posts on "Monetary Policy"October 02, 2020
Should Emerging Economies Embrace Quantitative Easing during the Pandemic?
Emerging economies are fighting COVID-19 and the economic sudden stop imposed by lockdown policies. Even before COVID-19 took root in emerging economies, however, investors had already started to flee these markets–to a much greater extent than they had at the onset of the 2008 global financial crisis (IMF, 2020; World Bank, 2020). Such sudden stops in capital flows can cause significant drops in economic activity, with recoveries that can take several years to complete (Benigno et al., 2020). Unfortunately, austerity and currency depreciations as enacted during the global financial crisis will not mitigate this double whammy of capital outflows and policies to cope with the pandemic. We argue that purchases of local currency government bonds could be a viable option for credible emerging market central banks to support macroeconomic policy goals in these circumstances.
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Posted by Blog Author at 7:00 AM in Central Bank, Exchange Rates, Monetary Policy | Permalink | Comments (0)September 22, 2020
Expanding the Toolkit: Facilities Established to Respond to the COVID-19 Pandemic
First of three posts
The Federal Reserve’s response to the coronavirus pandemic has been unprecedented in its size and scope. In a matter of months, the Fed has, among other things, cut the federal funds rate to the zero lower bound, purchased a large amount of Treasury securities and agency mortgage‑backed securities (MBS) and, together with the U.S. Treasury, introduced several lending facilities. Some of these facilities are very similar to ones introduced during the 2007-09 financial crisis while others are completely new. In this post, we argue that the new facilities, while unprecedented, are a natural extension of the Fed’s toolkit, as they operate through similar economic mechanisms to prevent self-reinforcing bad outcomes. We also explain why these new facilities are particularly useful as part of the response to the pandemic, which is an economic shock very different from a financial crisis.
Posted by Blog Author at 7:00 AM in Central Bank, Crisis, Federal Reserve, Liquidity, Monetary Policy, Pandemic | Permalink | Comments (0)September 18, 2020
What’s Up with the Phillips Curve?
U.S. inflation used to rise during economic booms, as businesses charged higher prices to cope with increases in wages and other costs. When the economy cooled and joblessness rose, inflation declined. This pattern changed around 1990. Since then, U.S. inflation has been remarkably stable, even though economic activity and unemployment have continued to fluctuate. For example, during the Great Recession unemployment reached 10 percent, but inflation barely dipped below 1 percent. More recently, even with unemployment as low as 3.5 percent, inflation remained stuck under 2 percent. What explains the emergence of this disconnect between inflation and unemployment? This is the question we address in “What’s Up with the Phillips Curve?,” published recently in Brookings Papers on Economic Activity.
Posted by Blog Author at 7:00 AM in DSGE, Inflation, Macroecon, Monetary Policy, Phillips Curve, Unemployment | Permalink | Comments (3)July 07, 2020
A New Reserves Regime? COVID-19 and the Federal Reserve Balance Sheet
Aggregate reserves declined from nearly $3 trillion in August 2014 to $1.4 trillion in mid-September 2019, as the Federal Reserve normalized its balance sheet. This decline came to a halt in September 2019 when the Federal Reserve responded to turmoil in short-term money markets, with reserves fluctuating around $1.6 trillion in the early months of 2020. Then, in response to the COVID-19 pandemic, the Federal Reserve dramatically expanded its balance sheet, both directly, through outright purchases and repurchase agreements, and indirectly, as a consequence of the facilities to support market functioning and the flow of credit to the real economy. In this post, we characterize the increase in reserves between March and June 2020, describing changes to the distribution and concentration of reserves.
Continue reading "A New Reserves Regime? COVID-19 and the Federal Reserve Balance Sheet" »
Posted by Blog Author at 7:00 AM in Fed Funds, Federal Reserve, Fiscal Policy, Liquidity, Monetary Policy, Pandemic | Permalink | Comments (0)June 22, 2020
Japan’s Experience with Yield Curve Control
In September 2016, the Bank of Japan (BoJ) changed its policy framework to target the yield on ten-year government bonds at “around zero percent,” close to the prevailing rate at the time. The new framework was announced as a modification of the Bank's earlier policy of rapid monetary base expansion via large-scale asset purchases—a policy that market participants increasingly regarded as unsustainable. While the BoJ announced that the rapid pace of government bond purchases would not change, it turned out that the yield target approach allowed for a dramatic scaling back in purchases. In Japan’s case, the commitment to purchase whatever was needed to keep the ten-year rate near zero has meant that very little in the way of asset purchases have been required.
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Posted by Blog Author at 7:00 AM in International Economics, Monetary Policy | Permalink | Comments (2)May 19, 2020
The Primary Dealer Credit Facility
This post is part of an ongoing series on the credit and liquidity facilities established by the Federal Reserve to support households and businesses during the COVID-19 outbreak.
On March 17, 2020, the Federal Reserve announced that it would re-establish the Primary Dealer Credit Facility (PDCF) to allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households. The PDCF started offering overnight and term funding with maturities of up to ninety days on March 20. It will be in place for at least six months and may be extended as conditions warrant. In this post, we provide an overview of the PDCF and its usage to date.
Posted by Blog Author at 7:00 AM in Bank Capital, Banks, Central Bank, Credit, Federal Reserve, Liquidity, Monetary Policy, Pandemic, Systemic Risk | Permalink | Comments (0)May 13, 2020
Inflation Expectations in Times of COVID-19
As an important driver of the inflation process, inflation expectations must be monitored closely by policymakers to ensure they remain consistent with long-term monetary policy objectives. In particular, if inflation expectations start drifting away from the central bank’s objective, they could become permanently “un-anchored” in the long run. Because the COVID-19 pandemic is a crisis unlike any other, its impact on short- and medium-term inflation has been challenging to predict. In this post, we summarize the results of our forthcoming paper that makes use of the Survey of Consumer Expectations (SCE) to study how the COVID-19 outbreak has affected the public’s inflation expectations. We find that, so far, households’ inflation expectations have not exhibited a consistent upward or downward trend since the emergence of the COVID-19 pandemic. However, the data reveal unprecedented increases in individual uncertainty—and disagreement across respondents—about future inflation outcomes. Close monitoring of these measures is warranted because elevated levels may signal a risk of inflation expectations becoming unanchored.
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Posted by Blog Author at 7:00 AM in Expectations, Inflation, Monetary Policy, Pandemic | Permalink | Comments (0)May 08, 2020
The Money Market Mutual Fund Liquidity Facility
This post is part of an ongoing series on the credit and liquidity facilities established by the Federal Reserve to support households and businesses during the COVID-19 outbreak.
Over the first three weeks of March, as uncertainty surrounding the COVID-19 pandemic increased, prime and municipal (muni) money market funds (MMFs) faced large redemption pressures. Similarly to past episodes of industry dislocation, such as the 2008 financial crisis and the 2011 European bank crisis, outflows from prime and muni MMFs were mirrored by large inflows into government MMFs, which have historically been seen by investors as a safe haven in times of crisis. In this post, we describe a liquidity facility established by the Federal Reserve in response to these outflows.
Continue reading "The Money Market Mutual Fund Liquidity Facility" »
Posted by Blog Author at 7:00 AM in Central Bank, Credit, Federal Reserve, Financial Institutions, Financial Intermediation, Financial Markets, Liquidity, Monetary Policy, Pandemic | Permalink | Comments (0)April 15, 2020
The COVID-19 Pandemic and the Fed’s Response
The Federal Reserve has taken unprecedented actions to mitigate the effects of the COVID-19 pandemic on U.S. households and businesses. These measures include cutting the Fed’s policy rate to the zero lower bound, purchasing Treasury and mortgage-backed securities (MBS) to promote market functioning, and establishing several liquidity and credit facilities. In this post, we briefly review the developments motivating these actions, summarize what the Fed has done and why, and compare the Fed’s response with its response to the 2007-09 financial crisis.
Continue reading "The COVID-19 Pandemic and the Fed’s Response" »
Posted by Blog Author at 4:11 PM in Crisis, Federal Reserve, FOMC, Great Recession, Monetary Policy, Pandemic | Permalink | Comments (0)April 10, 2020
Helping State and Local Governments Stay Liquid
This post is part of an ongoing series on the credit and liquidity facilities established by the Federal Reserve to support households and businesses during the COVID-19 outbreak.
On April 9, the Federal Reserve announced up to $2.3 trillion in new support for the economy in response to the coronavirus pandemic. Among the initiatives is the Municipal Liquidity Facility (MLF), intended to support state and local governments. The details of the facility are described in the term sheet. The state and local sector is a unique but very important part of the economy. This post lays out some of the economics of the sector and the needs that the facility intends to satisfy.
Continue reading "Helping State and Local Governments Stay Liquid" »
Posted by Blog Author at 4:25 PM in Central Bank, Fiscal Policy, Monetary Policy, Pandemic | Permalink | Comments (0)About the BlogLiberty 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.
Liberty Street Economics does not publish new posts during the blackout periods surrounding Federal Open Market Committee meetings.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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