Monetary Policy and the Federal Reserve: Current Policy and Conditions

Monetary Policy and the Federal Reserve: Current Policy and Conditions. Congressional Research Service. Marc Labonte. January 18, 2019

Congress has delegated responsibility for monetary policy to the Federal Reserve (the Fed), the nation’s central bank, but retains oversight responsibilities for ensuring that the Fed is adhering to its statutory mandate of “maximum employment, stable prices, and moderate long-term interest rates.” To meet its price stability mandate, the Fed has set a longer-run goal of 2% inflation.
The Fed’s control over monetary policy stems from its exclusive ability to alter the money supply and credit conditions more broadly. Normally, the Fed conducts monetary policy by setting a target for the federal funds rate, the rate at which banks borrow and lend reserves on an overnight basis. It meets its target through open market operations, financial transactions traditionally involving U.S. Treasury securities. Beginning in 2007, the federal funds target was reduced from 5.25% to a range of 0% to 0.25% in December 2008, which economists call the zero lower bound. By historical standards, rates were kept unusually low for an unusually long time to mitigate the effects of the financial crisis and its aftermath. Starting in December 2015, the Fed has been raising interest rates and expects to gradually raise rates further. The Fed raised rates once in 2016, three times in 2017, and four times in 2018, by 0.25 percentage points each time.

[PDF format, 22 pages].

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Real and Imagined Constraints on Euro Area Monetary Policy

Real and Imagined Constraints on Euro Area Monetary Policy. Peterson Institute for International Economics. Working Paper 18-8. Patrick Honohan. August 2018

 Although the European Central Bank (ECB) has been pursuing an aggressively expansionary policy since 2012, previously the ECB was behind the curve in lowering interest rates and making asset purchases to combat the prolonged euro area recession. This paper argues that part of the delay can be attributed to the multi-country nature of the euro area. Over-interpreting the limitations of the ECB’s statutory mandate, some ECB decision makers were wary of being accused of circumventing the prohibition on monetary financing by intervening in the market of the debt of weaker governments. Some were also mesmerized by the relatively strong performance of the German economy in the crisis and attributed the slower post-crisis recovery of most other member states to national policy failures that should not be offset by euro area monetary policy. All of this was exacerbated by the ECB’s adoption of and (at least until 2011) adherence to a seductive but analytically flawed “separation principle,” which misled some of its decision makers into overestimating the adequacy of the monetary expansion that was being applied. The ECB’s toolbox is indeed somewhat limited by its statute, reflecting multi-country considerations, but abandonment of the separation principle should help ensure a more effective, holistic approach to monetary policy design in the future. [Note: contains copyrighted material].

 [PDF format, 26 pages].

The First 20 Years of the European Central Bank: Monetary Policy

The First 20 Years of the European Central Bank: Monetary Policy. Brookings Institution. Philipp Hartmann and Frank Smets. September 13, 2018

 The European Central Bank’s Philipp Hartmann and Frank Smets provide a comprehensive view of the ECB’s monetary policy over these two decades. The authors provide a chronological account of the macroeconomic and monetary policy developments in the euro area since the adoption of the euro in 1999, and describe the monetary policy decisions from the ECB’s perspective and against the background of its evolving monetary policy strategy. [Note: contains copyrighted material].

 [PDF format, 70 pages].

Debates over Exchange Rates: Overview and Issues for Congress

Debates over Exchange Rates: Overview and Issues for Congress.  Congressional Research Service, Library of Congress. Rebecca M. Nelson. June 22, 2018

 Exchange rates are among the most important prices in the global economy. They affect the price of every country’s imports and exports, as well as the value of every overseas investment. Over the past decade, some Members of Congress have been concerned that foreign countries are using exchange rate policies to gain an unfair trade advantage against other countries, or “manipulating” their currencies. Congressional concerns have focused on China’s foreign exchange interventions over the past decade to weaken its currency against the U.S. dollar, although concerns have also been raised about a number of other countries pursuing similar policies.

 [PDF format, 29 pages].

The Dangerous Inadequacies of the World’s Crisis-Response Mechanisms

The Dangerous Inadequacies of the World’s Crisis-Response Mechanisms. Brookings Institution. Adam Triggs. May 4, 2018

 The paper war-games crisis scenarios based on past crises to test the adequacy of the global financial safety net: the international institutions and arrangements designated to help economies facing an economic or financial crisis. It calculates the size of the safety net in aggregate terms and from the perspective of each G-20 economy. It explores whether the safety net is large enough, how the different components of the safety net would need to interact during a crisis and how this differs for different countries and regions. For some widespread shocks, the paper finds that the safety net struggles to provide even the same level of support as it has in the past. Even for smaller shocks, multiple components of the safety net need to be coordinated, a process complicated by the differing objectives, mandates and interdependencies of each component. The paper shows how the safety net’s coverage has become patchier, leaving many emerging market and developing economies exposed. It explores what the G-20 could do to strengthen the safety net, reporting the results from in-depth interviews with 61 leaders, central bank governors, ministers and officials from across the G-20, including Janet Yellen, Kevin Rudd, Ben Bernanke, Haruhiko Kuroda, Jack Lew, Mark Carney and 55 others. [Note: contains copyrighted material].

 [PDF format, 47 pages].

Climate Change and Monetary Policy: Dealing with Disruption

Climate Change and Monetary Policy: Dealing with Disruption. Brookings Institution. Warwick J. McKibbin et al. Friday, December 1, 2017

 Policy responses to climate change can have important implications for monetary policy and vice versa. Different approaches to imposing a price on carbon will impact energy and other prices differently; some would provide stable and predictable price outcomes, and others could be more volatile.

In “Climate change and monetary policy: Dealing with disruption”, the authors  explore the interaction of monetary policy and climate change as they jointly influence macroeconomic outcomes. [Note: contains copyrighted material].

 [PDF format, 32 pages, 516.3 KB].

Monetary Policy in a New Era

Monetary Policy in a New Era. Brookings Institution. Ben S. Bernanke. October 12, 2017

The former Chairman of the Federal Reserve Ben Bernanke presented the following framework at a conference on Rethinking Macroeconomic Policy at the Peterson Institute on October 12-13, 2017. [Note: contains copyrighted material].

[PDF format, 49 pages, 713.9 KB].