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Primary Monetary Policy Tools
Jill StudentJack DeskoccupierDan Intheclouds
Joanie Willgraduatesoon
Austrian EconomicsMay Term 2015
Professor Hal SnarrWestminster College
Q
DR
0
SR
iff
Interest on reserves– In 10/08, the Fed began paying interest on reserves (ior)
Federal Funds Market
1.5
0.5
Primary Monetary Policy Tools
Q
0.5
DR
-0.9
0
SR
iff
Crisis mode
0.5
Interest on reserves– In 10/08, the Fed began paying interest on reserves (ior)– After the Fed purchased of trillions of dollars in securities, reserves supply increased– The federal funds rate may have went negative.– Setting interest on reserves put a price floor on the federal funds rate
Federal Funds Market
1.5
Primary Monetary Policy Tools
Q
DR
SR
iff Federal Funds Market
Interest on reserves– In 10/08, the Fed began paying interest on reserves (ior)– After the Fed purchased of trillions of dollars in securities, reserves supply increased– The federal funds rate may have went negative.– Crisis mode allows the Fed to buy or sell as many securities as it wants without
changing the federal funds rate.
0
1.5
0.5
Primary Monetary Policy Tools
Q
DR
SR
iff Federal Funds Market
Interest on reserves– In 10/08, the Fed began paying interest on reserves (ior)– After the Fed purchased of trillions of dollars in securities, reserves supply increased– The federal funds rate may have went negative.– Crisis mode allows the Fed to buy or sell as many securities as it wants without
changing the federal funds rate.
0
1.5
0.5
Primary Monetary Policy Tools
Q
DR
SR
iff Federal Funds Market
Interest on reserves– In 10/08, the Fed began paying interest on reserves (ior)– After the Fed purchased of trillions of dollars in securities, reserves supply increased– The federal funds rate may have went negative.– Crisis mode allows the Fed to buy or sell as many securities as it wants without
changing the federal funds rate.
0
1.5
0.5
Primary Monetary Policy Tools
Q
DR
SR
iff Federal Funds Market
Interest on reserves– In 10/08, the Fed began paying interest on reserves (ior)– After the Fed purchased of trillions of dollars in securities, reserves supply increased– The federal funds rate may have went negative.– Crisis mode allows the Fed to buy or sell as many securities as it wants without
changing the federal funds rate.
0
1.5
0.5
Primary Monetary Policy Tools
iff Federal Funds Market
Interest on reserves
Q
DR
SR
– In 10/08, the Fed began paying interest on reserves (ior)– After the Fed purchased of trillions of dollars in securities, reserves supply increased– The federal funds rate may have went negative.– Crisis mode allows the Fed to buy or sell as many securities as it wants without
changing the federal funds rate.
0
1.5
0.5
Primary Monetary Policy Tools
iff Federal Funds Market
Q
DR
SR
– The Fed raises the federal funds rate by announcing a hike in ior and id
Interest on reserves
1.5
0.5
0
2.75
1.75
Primary Monetary Policy Tools
3
4SR
Federal Funds Market
– The Fed lowers the federal funds rate by announcing reductions in ior and id – To go back to normal mode, the Fed will allow reserves demand to rise (via economic
growth), conduct several controlled OMSs, and adjust ior higher and higher, while it monitors inflation
– The Fed raises the federal funds rate by announcing a hike in ior and id
Interest on reserves
1.5
0.5
iff
Q0
Primary Monetary Policy Tools