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Report
The mechanics of a graceful exit: interest on reserves and segmentation in the federal funds market
To combat the financial crisis that intensified in the fall of 2008, the Federal Reserve injected a substantial amount of liquidity into the banking system. The resulting increase in reserve balances exerted downward price pressure in the federal funds market, and the effective federal funds rate began to deviate from the target rate set by the Federal Open Market Committee. In response, the Federal Reserve revised its operational framework for implementing monetary policy and began to pay interest on reserve balances in an attempt to provide a floor for the federal funds rate. Nevertheless, ...
Working Paper
Three Scenarios for Interest Rates in the Transition to Normalcy
This article develops time-series models to represent three alternative, potential monetary policy regimes as monetary policy returns to normal. The first regime is a return to the high and volatile inflation rate of the 1970s. The second regime, the one that most Federal Reserve officials and business economists expect, is a return to the credible low inflation policy that characterized the U.S. economy from 1983 to 2007, a period that has come to be known as the Great Moderation. The third regime is one in which policymakers decide to keep policy interest rates at or near zero for the ...