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MONETARYPOLICYCLASS - Monetary Policy History Strategy 46...

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1 Monetary Policy, History & Strategy 1 46 bennie & the, hubbard, fed vids? The Fed normally targets the Fed Funds rate which it controls through open market operations, primarily repos, which influence bank reserves and thus the funds rate on these reserves. It no longer discusses monetary aggregates or targets them. It’s primary long-run ‘goal’ is price stability and it believes, in normal times, that low inflation will yield maximum long-run employment/growth and moderate long-run rates. The FOMC meets every 6 weeks, and hears forecasts and … and issues a statement and a directive to manager of open market desk. Fed has moved to maximum transparency. Has previously focused on ‘balance of risks’ – i.e., whether inflation or recession poses more of a threat. Open market operations are the primary tool in normal times, with discount policy passive- i.e., the discount rate is set 1% above the funds rate target. Normally the Fed is very concerned with controlling inflationary expectations 2 Normally, the Fed is very concerned with controlling inflationary expectations and believes that transparency and credibility will allow it to do this. Since actual inflation = f(expected inflation, - U) if inflationary expectations increase, inflation will and it becomes difficult to bring it under control. A nominal anchor (low inflation say) and credibility (the Fed will do what it takes – recession- to keep inflation low) will keep inflationary expectations low and thus inflation low. The Taylor rule started as a description of how Fed policy makers acted in setting the Fed Funds rate, but has become a ‘prescription’ as to what the rate should be. In current situation, the Fed has creatively expanded lender of last resort role thru new lending facilities, provided direct lending, and undertaken other measures which have dramatically expanded its balance sheet. There is now talk of an exit strategy (how to reduce its balance sheet) In the News? 3
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