The Federal Reserve has been trying hard to communicate that it intends to keep short-term interest rates low for quite some time. The market seems to have embraced the message.
Category Archives: financial markets
Summarizing monetary policy
Before 2008, U.S. monetary policy was primarily conducted in terms of a target set by the Federal Reserve for the fed funds rate, which is the interest rate a bank pays to borrow funds overnight from other banks. A large academic literature used the fed funds rate as a summary of monetary policy, looking at its correlations in dynamic regressions with other variables of macroeconomic interest. But the fed funds rate has been stuck near zero for the last 5 years, and will likely be replaced by an alternative policy focus even once we exit the zero lower bound. Economic researchers face not just the difficulty of summarizing what the Fed has been doing in the current and future environment, but also the practical challenge of how to update their historical regressions to try to describe the full set of historical data along with the new experience in a coherent way. Here I describe a new research paper that suggests one solution to these problems.
What Currencies Are Foreign Exchange Reserves Held In?
Following up on the dollar’s status as an international currency (and how threats of default are not helpful), here is what we know about the dollar’s role as a reserve currency.
American Debt, Chinese Anxiety, Elaborated
Or, how the Tea Party is working hard to sabotage the dollar’s role in global finance.
Debt Ceiling Watch (III)
Lots of pooh-poohing of the implications of a debt-ceiling crisis. It’s instructive to examine what happened to equity markets when we last came close to a breach, but the Government didn’t actually default.
Debt Ceiling Watch (II): October 2
From Alec Phillips/Goldman Sachs today (not online):
…the Treasury bill market is clearly indicating concern about upcoming debt ceiling deadlines …
Debt Ceiling Watch
From WSJ, a picture of rising risk perception surrounding a debt ceiling crisis:
The Absolute Funniest Thing I Have Read This Year
From Ed (We Are Not in a Recession) Lazear and Keith Hennessey, “Bush ended financial crisis before Obama took office — three important truths about 2008”, FoxNews (9/16):
Prescience, 2007 edition
Having coauthored an entire book on the financial crisis of 2008 (Lost Decades, with Jeffry Frieden) I think that one of the most important qualities for a policymaker is the ability to look forward, and assess potential dangers and understand why those dangers arise. Looking back to 2007, it’s of interest to see who foresaw the impact of adverse feedback loops in the financial system as risk was repriced.
The all-powerful Fed
The conventional wisdom is that the big jump in interest rates since the beginning of May is the result of a poorly conceived or poorly communicated shift in policy by the U.S. Federal Reserve. The conventional wisdom is wrong.