Category Archives: Federal Reserve

Forward guidance

According to economic theory, one of the most promising ways in which monetary policy might be able to stimulate an economy in which the nominal interest rate has reached zero is to promise to follow a different policy rule once interest rates are again positive. A commitment to more stimulus and inflation in the future regime could in principle influence expectations and actions of people in the economy today, and thereby offer a means by which the central bank could help an economy recover from the zero lower bound. But as a practical matter, how does the Fed communicate to the public at date t something it intends to do at some future date t+h?
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Are stocks and housing off on another bubble?

Alex Brummer reports:

As a new year gets under way [Nobel Laureate Robert] Shiller fears that advanced economies could be on the cusp of another stock market and property bubble that could end in tears….

“I’ve tried to inquire why we are having these booms right now at a time of so-called secular stagnation with low interest rates, and arrived at the thought that low interest rates are promoting these bubbles.”

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Managing the Fed’s balance sheet

Last week I discussed the tools that the Federal Reserve will be using to raise short-term interest rates as we enter the next phase of U.S. monetary policy. In brief, the Fed plans to use interest on reserves and reverse repurchase agreements as an offer to borrow back Federal Reserve deposits at an annual rate between 25 and 50 basis points (0.25% to 0.50% interest per year). That offer from the Fed puts an effective floor under the fed funds rate, which is the rate at which institutions would lend these funds overnight to other banks. When the Fed raises its offering rate, the fed funds rate should go up with it. Today I look at the implications of these new procedures for the Fed’s balance sheet.
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