The Federal Reserve has increased its assets from $900 billion in 2007 to over $3,150 billion and still climbing today. On the liabilities side of the Fed’s balance sheet, reserve balances held by banks have gone from $10 B in 2007 to $1,750 B and climbing today. My expectation had always been that this would be a temporary situation, with a return to historical norms when economic conditions improved. Recently, three different teams have independently studied what that transition back to normal might look like. One study was carried out by Robert Hall and Ricardo Reis (professors at Stanford and Columbia, respectively) and another by Seth Carpenter, Jane Ihrig, Elizabeth Klee, Alexander Boote, and Daniel Quinn (all economists at the Federal Reserve Board). I participated in a third study with David Greenlaw at Morgan Stanley, Peter Hooper at Deutsche Bank, and Frederic Mishkin at Columbia. Our analysis used a similar methodology to that conducted by the Fed staff, and we reached similar conclusions to theirs, while Hall and Reis took a broader and more theoretical perspective. Here I describe the methods and findings of our study.
Category Archives: Federal Reserve
Bernanke on long-term interest rates
On Friday I attended a conference at the Federal Reserve Bank of San Francisco, which included a very interesting presentation by Fed Chairman Ben Bernanke on long-term interest rates.
QE3 and beyond
Now that we’ve closed the books on 2012, I thought it might be useful to take a look at where monetary policy has led us over the last four years.
U.S. government profits from AIG bailout
A key player in the financial crisis was insurance giant AIG, which sold a huge volume of credit default swaps supposedly protecting buyers of mortgage-backed securities from losses due to default. But AIG had nowhere near the capital necessary to honor these guarantees when things went bad, and much of AIG’s liabilities ended up being picked up by the Fed and the Treasury. On Tuesday the U.S. Treasury announced that it had sold the last of the common shares in AIG that it had acquired as compensation for its emergency assistance to AIG and reported that the Treasury and the Fed had together earned a profit of $22.7 billion as a result of their assistance to AIG. I was curious to take a look at how this story ended up having a happy ending.
Conditional Inflation Targeting in Effect
Nearly a year ago, Jeffry Frieden and I called for Conditional Inflation Targeting. Today, policy seems to have turned toward that direction. From today’s statement from the FOMC:
Trillion dollar platinum coin
Here’s one of the wilder suggestions floating around for what the President could do if Congress fails to raise the debt ceiling.
Links for 2012-11-10
A few links to some items I found of interest.
Fat fingers and the price of oil
Can the wild swings in the price of oil over the last few weeks have anything to do with supply and demand?
Effects of QE3
On Thursday the Federal Reserve announced a series of measures that will come to be referred to as a third round of “quantitative easing,” or QE3. Here I review what effects this is intended to have and some of the developments so far.
Woodford and QE3
Columbia University Professor Michael Woodford’s paper at the Fed’s Jackson Hole conference last week made the case that more large-scale asset purchases by the Fed would by themselves do nothing, and suggested that instead what really matters is the Fed’s communication of its future intentions. There’s a fair bit in Woodford’s analysis that I agree with. But unlike Woodford, I think that asset purchases can be an important part of what the Fed could do in the here and now. Here I explain why.