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67 posts on "Monetary Policy"
December 19, 2023

Dropping Like a Stone: ON RRP Take‑up in the Second Half of 2023

Decorative photo of tall buildings with bank sign and spreadsheet overlay.

Take-up at the Overnight Reverse Repo Facility (ON RRP) has halved over the past six months, declining by more than $1 trillion since June 2023. This steady decrease follows a rapid increase from close to zero in early 2021 to $2.2 trillion in December 2022, and a period of relatively stable balances during the first half of 2023. In this post, we interpret the recent drop in ON RRP take-up through the lens of the channels that we identify in our recent Staff Report as driving its initial increase.

November 21, 2023

The New York Fed DSGE Model Perspective on the Lagged Effect of Monetary Policy

Decorative image: Factory workers on an assembly line with baseball caps on.

This post uses the New York Fed DSGE model to ask the question: What would have happened to interest rates, output, and inflation had the Federal Reserve been following an average inflation targeting (AIT)-type reaction function since 2021:Q2, when inflation began to rise—as opposed to keeping the federal funds rate at the zero lower bound (ZLB) until March 2022, and then raising it aggressively thereafter? We show that actual policy was more accommodative in 2021 than implied by the AIT reaction function and then more contractionary in 2022 and beyond. On net, the lagged effect of monetary policy on the level of GDP, when measured relative to the counterfactual, has been positive throughout the forecast horizon, due to the initial boost associated with keeping the fed funds rate near zero in 2021.

Posted at 7:01 am in DSGE, Monetary Policy | Permalink

A Bayesian VAR Model Perspective on the Lagged Effect of Monetary Policy

Decorative image: Factory workers on an assembly line with baseball caps on.

Over the last few years, the U.S. economy has experienced unusually high inflation and an unprecedented pace of monetary policy tightening. While inflation has fallen recently, it remains above target, and the economy continues to expand at a robust pace. Does the resilience of the U.S. economy imply that monetary policy has been ineffectual? Or does it reflect that policy acts with “long and variable lags” and so we haven’t yet observed the full effect of the monetary tightening that has already taken place? Using a Bayesian vector autoregressive (BVAR) model, we show that economic activity has, indeed, been substantially stronger than would have been anticipated considering the rapid policy tightening. Still, the model expects a significant slowdown in 2024-25, even though short-term interest rates are forecasted to fall.

August 10, 2023

The Evolution of Short‑Run r* after the Pandemic

Decorative: U.S. dollars and surgical masks in a still life.

This post discusses the evolution of the short-run natural rate of interest, or short-run r*, over the past year and a half according to the New York Fed DSGE model, and the implications of this evolution for inflation and output projections. We show that, from the model’s perspective, short-run r* has increased notably over the past year, to some extent outpacing the large increase in the policy rate. One implication of these findings is that the drag on the economy from recent monetary policy tightening may have been limited, rationalizing why economic conditions have remained relatively buoyant so far despite the elevated level of interest rates.

Posted at 7:00 am in DSGE, Macroeconomics, Monetary Policy | Permalink
August 2, 2023

Why Do Forecasters Disagree about Their Monetary Policy Expectations?

Decorative: woman dressed in red standing in the center of four arrows painted on a green asphalt pointing in four different directions, i.e., north, east, south and west.

While forecasters generally disagree about the expected path of monetary policy, the level of disagreement as measured in the New York Fed’s Survey of Primary Dealers (SPD) has increased substantially since 2022. For instance, the dispersion of expectations about the future path of the target federal funds rate (FFR) has widened significantly. What explains the current elevated disagreement in FFR forecasts?

June 23, 2023

The Credibility of Government Policies: Conference in Honor of Guillermo Calvo

Guillermo Calvo is a leading member of a group of economists who revolutionized macroeconomics by modeling how incentives and the anticipation of future policies affect aggregate outcomes. In celebration of his work, a conference was held in his honor at the Federal Reserve Bank of New York and at Columbia University on February 22-24, 2023. The conference program can be found on the event website. A longer version of this post with additional detail on the proceedings can be found here.

May 11, 2023

Bank Funding during the Current Monetary Policy Tightening Cycle

decorative photo: image of the outside of a silicon valley bank building.

Recent events have highlighted the importance of understanding the distribution and composition of funding across banks. Market participants have been paying particular attention to the overall decline of deposit funding in the U.S. banking system as well as the reallocation of deposits within the banking sector. In this post, we describe changes in bank funding structure since the onset of monetary policy tightening, with a particular focus on developments through March 2023.

May 5, 2023

MCT Update: Inflation Persistence Continued to Decline in March

Decorative photo: Closeup of sales receipt

This post presents an updated estimate of inflation persistence, following the release of personal consumption expenditure (PCE) price data for March 2023. The estimates are obtained by the Multivariate Core Trend (MCT), a model we introduced on Liberty Street Economics last year and covered most recently in a March post. The MCT is a dynamic factor model estimated on monthly data for the seventeen major sectors of the PCE price index. It decomposes each sector’s inflation as the sum of a common trend, a sector-specific trend, a common transitory shock, and a sector-specific transitory shock. The trend in PCE inflation is constructed as the sum of the common and the sector-specific trends weighted by the expenditure shares. 

Posted at 7:00 am in Inflation, Macroeconomics | Permalink
April 11, 2023

Deposit Betas: Up, Up, and Away?

decorative image: close up shot of bank deposit slip

Deposits make up an $18 trillion market that is simultaneously the main source of bank funding and a critical tool for households’ financial management. In a prior post, we explored how deposit pricing was changing slowly in response to higher interest rates as of 2022:Q2, as measured by a “deposit beta” capturing the pass-through of the federal funds rate to deposit rates. In this post, we extend our analysis through 2022:Q4 and observe a continued rise in deposit betas to levels not seen since prior to the global financial crisis. In addition, we explore variation across deposit categories to better understand banks’ funding strategies as well as depositors’ investment opportunities. We show that while regular deposit funding declines, banks substitute towards more rate-sensitive forms of finance such as time deposits and other forms of borrowing such as funding from Federal Home Loan Banks (FHLBs).

Posted at 10:00 am in Banks, Fed Funds | Permalink
April 3, 2023

Monetary Policy Transmission and the Size of the Money Market Fund Industry: An Update

photo: The Marriner S. Eccles Federal Reserve building in Washington, D.C. Photographer: Stefani Reynolds/Bloomberg

The size of the money market fund (MMF) industry co-moves with the monetary policy cycle. In a post published in 2019, we showed that this co-movement is likely due to the stronger response of MMF yields to monetary policy tightening relative to bank deposit rates, combined with MMF shares and bank deposits being close substitutes from an investor’s perspective. In this post, we update the analysis and zoom in to the current monetary policy tightening by the Federal Reserve.

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