Policy tools

Improving U.S. Monetary Policy Communications

Tomorrow, June 4, we will present our paper, Improving U.S. Monetary Policy Communications, as part of the Federal Reserve’s review of its monetary policy strategy, tools, and communications practices. This post summarizes our methodology, analysis and recommendations.

——————————————————————————————————-

Since the mid-1990s, the U.S. economy has been reaping the benefits of a credible commitment to price stability, including a communications framework that reinforces that commitment. Over the same period, both the level and uncertainty of inflation have declined (see here).  It is against this backdrop that we look for further enhancements in the Federal Open Market Committee’s (FOMC) communications framework.

Read More

How the Fed will tighten

Before the financial crisis, tightening monetary policy was straightforward. The Federal Open Market Committee (FOMC) would announce a rise in the target for the federal funds rate in the overnight interbank lending market, and the open market desk would implement it with a small reduction in the quantity of reserves in the banking system.

Matters are no longer so simple. The unconventional policies designed first to avert a financial and economic collapse, and then to spur growth and employment, have left the banking system with reserves that are so abundant that it would be impossible to tighten policy in the conventional manner.

So, as the FOMC moves to "normalize" monetary policy after years of extraordinary accommodation, how, precisely, will the Fed tighten monetary policy? ...

Read More