Implementation of monetary policy

Implementation of monetary policy

The Federal Reserve establishes the monetary policy of the EE. UU In accordance with your congressional mandate: promote maximum employment, stable prices and moderate long-term interest rates in the US economy. UU

The Federal Reserve achieves these objectives by managing the level of short-term interest rates, specifically, by establishing an objective (or target range) for the federal funds rate, which is an interbank, unsecured, interbank interest rate. The level of short-term interest rates influences the availability and cost of credit in the economy and, ultimately, in the economic decisions made by businesses and households.

The Federal Reserve has a variety of tools to implement monetary policy. The Board of Governors of the Federal Reserve System (Board of Governors) is responsible for the tools, such as the discount rate, reserve requirements and interest on reserves; and the Federal Open Market Committee (FOMC) is responsible for open market operations.

Since 1936, the FOMC has annually selected the Federal Reserve of New York to execute transactions for the Open Market Account System (SOMA), the most important asset in the balance of the Federal Reserve, and issued a directive to the Board of Directors. Open Market Operations of the New York Federal Reserve (the Bureau) to undertake open market operations. The Office executes the operations authorized and directed by the FOMC to achieve specific objectives, such as the target federal funds rate or size or composition for SOMA’s securities holdings. The FOMC selects a SOMA administrator to inform the Committee about SOMA transactions and financial market conditions.

The FOMC approach to implementing monetary policy has evolved over time.

Implementation of the pre-crisis policy
Prior to the financial crisis, the FOMC achieved its federal funds’ rate goal by ordering the New York Fed to actively manage the supply of reserves in the banking system. The Desk purchased and sold Treasury securities directly or through repurchase and reverse repurchase agreements so that the supply of reserves in the banking system is in line with the estimated amount of reserve balances demanded at the FOMC target rate.

Implementation of policies during and after the financial crisis.

The financial crisis caused several important changes in the implementation of monetary policy. As part of its effort to counteract the economic effects of the crisis, the FOMC reduced its target for the federal funds rate in several steps, from 5¼ percent in mid-2007 to a range of zero to ¼ percent in December 2008 The long-term interest rates were effectively restricted in the lower limit of zero, the FOMC changed the focus of its monetary policy implementation directives to the SOMA portfolio. The changes in the size and composition of the portfolio allowed a greater relaxation of monetary conditions.

Policy normalization
In 2014, the FOMC indicated that the normalization of monetary policy would have two main components: gradually increase the target range of the federal funds rate to more normal levels and gradually reduce the holdings of SOMA securities. The FOMC described the approach foreseen for these objectives in a statement of Policy Normalization Principles and Plans, initially published in September 2014 and updated periodically with additional details.

In December 2015, the FOMC raised its target range for the federal funds rate for the first time since the financial crisis and indicated that adjustments to short-term interest rates would once again be the main tool for adjusting the Fed’s position. monetary politics. However, with an abundant supply of reserve balances, the implementation of monetary policy required a new operational approach, since small variations in the supply of reserves will no longer cause significant changes in the federal funds rate.

In September 2017, the FOMC announced its intention to begin normalizing the SOMA portfolio in October 2017, by gradually and predictably reducing the reinvestment of capital payments received from the SOMA securities.

Additional Operations
To support the effective realization of open market operations, the Office provides eligible Treasury and agency debt securities held in SOMA overnight. In addition, to maintain its readiness to operate in any of the ways that the FOMC could direct in the future, the Office conducts small value exercises from time to time across a range of types of operations, such as a matter of advance planning. prudent. These operations do not represent a change in the stance of monetary policy.

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