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Excess Reserves and the New Challenges for Monetary Policy
Economic Brief March 2010, EB10 -03 In recent months, the level of total reserves held by depository Excess reserves and institutions (DIs) in the United States has been consistently above $1 the New challenges trillion. Of this, required reserves have been less than 7 percent. In the for Monetary Policy five years prior to September 2008, total reserves fluctuated between $38 billion and $56 billion, and required reserves fluctuated between 80 percent and 99 percent of total reserves. Hence, the recent level By huberto M. Ennis and alexander L. Wolman of reserves represents a dramatic change from previous experience. There has been much debate about the implications of high levels of Interest on reserves allows the reserves for the economy and how monetary policy is conducted. In this Economic Brief , we bring attention to the consequences of these Federal Reserve to pursue an appropriate large reserve balances for the Federal Reserve’s ability to adjust its monetary policy even with a high level of policy stance in a timely manner. excess reserves. However, a banking system Several factors help to explain why today the level of reserves is so high flush with excess reserves can raise the risk of by historical standards. In September and October 2008, riskless market monetary policy getting behind the curve. interest rates fell at all maturities. Since these lower interest rates also represented a lower opportunity cost of holding reserves, DIs moved to holding higher levels of reserves. In addition, the weakened condition of many DIs and the financial system as a whole caused an increase in demand for the most liquid assets, such as reserves.The Fed accommo - dated this by increasing the supply in an effort to maintain its interest rate target.While demand-related factors played a role in the initial buildup of reserves (approximately $140 billion), the lion’s share of the increase resulted from an unprecedented expansion of the Fed’s balance sheet and the ability to pay interest on reserves (IOR). -
Inflation Targeting
A SYMPOSIUM OF VIEWS Inflation Targeting Should the Federal Reserve in its conduct of monetary policy follow ome argue that while Fed Chairman Alan Greenspan, in office since 1987, has been an extraordinarily sub- Stle and skillful manager, his successor may not en- the European Central joy these unique skills. Thus, the system needs eventually to agree on a series of guiding benchmarks if not a target for use Bank and adopt some in the conduct of monetary policy. Globally, such an addi- tional tool might help in the convergence process and po- form of inflation target tentially create more stability for exchange rates. Others counter that it is not wise to lock the system range? TIE asked thirteen into a simplistic rule, or set of rules, particularly at a time of continued geopolitical uncertainty. Still others distinguished experts. counter that the European Central Bank established provisions that have successfully anticipated such ex- ternal shocks to the system. Is the time approaching for the U.S. central bank to adopt an inflation target or inflation target range? Or does the U.S. monetary system require a more prag- THE MAGAZINE OF INTERNATIONAL ECONOMIC POLICY matic and intuitive approach? To what extent should an 2099 Pennsylvania Avenue, N.W., Suite 950 Washington, D.C. 20006 inflation target be discretionary? Phone: 202-861-0791, Fax: 202-861-0790 www.international-economy.com 24 THE INTERNATIONAL ECONOMY WINTER 2004 I will therefore simply sketch out what has worked well for us at the ECB. We announced our monetary poli- Inflation targets are cy strategy in October 1998. -
Large Excess Reserves and the Relationship Between Money and Prices by Huberto M
Economic Brief February 2019, EB19-02 Large Excess Reserves and the Relationship between Money and Prices By Huberto M. Ennis and Tim Sablik As a consequence of the Federal Reserve’s response to the financial crisis of 2007–08 and the Great Recession, the supply of reserves in the U.S. banking system increased dramatically. Historically, over long horizons, money and prices have been closely tied together, but over the past decade, prices have risen only modestly while base money (reserves plus currency) has grown sub- stantially. A macroeconomic model helps explain this behavior and suggests some potential limits to the Fed’s ability to increase the size of its balance sheet indefinitely while remaining consistent with its inflation-targeting policy. Macroeconomic models have long predicted a of reserves in the banking system in response tight long-run relationship between the supply to the financial crisis of 2007–08 and the Great of money in the economy and the overall price Recession. At the same time, prices grew at only level. Money in this context refers to the quantity 1.8 percent per year on average. This Economic of currency plus bank reserves, or what is some- Brief provides one explanation for this behavior times called the monetary base. As the monetary and examines whether there might be limits to base increases, prices also should increase on a the decoupling of money from prices. one-to-one basis. A Period of “Unconventional” Policy This theory also has been confirmed empirically. In response to the financial crisis of 2007–08, According to Robert Lucas of the University of the Fed employed a number of extraordinary Chicago, who received the Nobel Prize in Eco- measures to stabilize the financial system and nomics in 1995 in part for his work in this area, help the economy weather the Great Recession. -
The Equity Market Faces a Growth Risk in the Second Half of 2021
Mott Capital Management | Tactical Update May 30, 2021 Mott Capital Management, LLC Reading The Markets | The Week Ahead Michael J. Kramer MARKET STRATEGIST The Equity Market Faces A Growth Risk In The Second Half of 2021 As we enter June, we will quickly be approaching the end of the first half of 2021, and with that, investors are likely to begin turning their attention to 2022. As that happens, investors may quickly learn that equities face more than just interest rate and inflation risk. Growth risk is likely to become an overwhelming issue for equities and as the high earnings growth rate of 2021 moves to a much slower pace in 2022. Consensus analysts' estimates using a bottom-up approach suggest that earnings growth rates in 2022 will sink to 11.9% from 36.5% in 2021 and 10.6% in 2023 (Figure 1). I believe this is likely to result in the PE multiple of the S&P 500 compressing in the second half of 2021. This process may have already started. The PE multiple of the S&P 500 has not expanded since the beginning of 2021. More recently, it began to decline in April. Looking back to the late 1990s and early 2000s, another period of high PE multiples, we saw that the cycle only lasted for as long as the growth rate held up. Once growth rates in 2001 began to roll over the PE multiple, and the broader S&P 500 began to roll over with it. Based on that cycle, it would appear that the current cycle has now peaked, and from here, the PE should continue to compress (Figure 2, 3 & 4). -
Netw Rks Reading Essentials and Study Guide
NAME ________________________________________ DATE _______________ CLASS _________ Reading Essentials and Study Guide netw rks Chapter 16: Monetary Policy Lesson 2 Monetary Policy ESSENTIAL QUESTION How does the government promote the economic goals of price stability, full employment, and economic growth? Reading HELPDESK Academic Vocabulary explicit openly and clearly expressed Content Vocabulary fractional reserve system system requiring financial institutions to set aside a fraction of their deposits in the form of reserves legal reserves currency and deposits used to meet the reserve requirements reserve requirement formula used to compute the amount of a depository institution’s required reserves member bank reserve (MBR) reserves kept by member banks at the Fed to satisfy reserve requirements excess reserves financial institution’s cash, currency, and reserves not needed for reserve requirements; potential source of new loans monetary policy actions by the Federal Reserve System to expand or contract the money supply to affect the cost and availability of credit interest rate the price of credit to a borrower easy money policy monetary policy resulting in lower interest rates and greater access to credit; associated with an expansion of the money supply tight money policy monetary policy resulting in higher interest rates and restricted access to credit; associated with a contraction of the money supply open market operations monetary policy in the form of U.S. Treasury bills, or notes, or bond sales and purchases by the Fed discount -
January 2021 Fri, Jan 1
January 2021 Fri, Jan 1 All Day Bank Holiday 1 January 2021 Mon, Jan 4 All Day 2021 AEA/ASSA Annual Meeting Virtual Event 8:30 AM – 8:55 AM Morning Checkpoint Call John to dial in 8:55 AM – 9:00 AM Blocked 9:00 AM – 9:30 AM Markets Group 9:05/9:20 Conference Call John to dial in 9:30 AM – 2:00 PM Blocked 2:00 PM ‐2:30 PM Meeting with Daleep Singh Skype 2:30 PM – 6:00 PM Blocked Tue, Jan 5 All Day 2021 AEA/ASSA Annual Meeting Virtual Event 9:00 AM – 9:30 AM Markets Group 9:05/9:20 Conference Call John to dial in 9:30 AM – 12:00 PM Blocked 12:00 PM – 12:30 PM Meeting with the Board John to dial in 12:30 PM – 1:00 PM Blocked 1:00 PM – 1:45 PM Weekly Email Discussion Skype 1:45 PM – 2:00 PM Blocked 2:00 PM – 2:30 PM Weekly Meeting with Chair Jay Powell Skype 2:30 PM – 3:30 PM Blocked 3:30 PM – 3:45 PM Tech Set‐Up for ASSA Panel: The Monetary‐Fiscal Nexus with Ultra Low Interest Rates Zoom 3:45 PM – 5:45 PM John to chair ASSA Panel: The Monetary‐Fiscal Nexus with Ultra Low Interest Rates Zoom 5:45 PM – 6:00 PM Blocked 1 January 2021 Wed, Jan 6 8:30 AM – 8:55 AM Morning Checkpoint Call John to dial in 8:55 AM – 9:00 AM Blocked 9:00 AM – 9:30 AM Markets Group 9:05/9:20 Conference Call John to dial in 9:30 AM – 10:00 AM Phone Call with Barbara Van Allen, ECNY John to initiate the call 10:00 AM – 10:15 AM Phone Call with Luiz Pereira da Silva, BIS Deputy General Manager John to initiate the call 10:15 AM – 10:30 AM Blocked 10:30 AM – 11:30 AM Government Relations Committee Meeting Skype 11:30 AM – 1:00 PM Blocked 1:00 PM – 2:00 PM FVP Interview -
Is the Fed Too Active?
OPINION BY KARTIK ATHREYA Is the Fed Too Active? ome observers have recently voiced concern that Fed So the goal of redressing at least some aspects of activities in the areas of climate change and inequal- economic inequality has long been a Fed concern. Indeed, Sity may put the institution at risk. In a forthcoming the Richmond Fed strives to understand the full range of Duke Law Journal article, for instance, Christina Parajon economic outcomes of Fifth District residents, including Skinner of the University of Pennsylvania’s Wharton School inequities, and among them, those that occur along racial argues that the Fed must avoid the temptation to engage in lines. To fail here would hinder our ability to fulfill our “central bank activism” by pushing its powers beyond the mandate under the CRA and to provide better informa- text and purpose of its legal mandate to address “imme- tion via the Beige Book and other means to guide mone - diate public policy problems” such as climate change tary policy. As Richmond Fed President Tom Barkin and economic inequality. She cautions, “Activism under- has pointed out, “The regional Fed banks are charged mines the legitimacy of central bank authority, with understanding the dynamics within our erodes its political independence, and ultimately “We should districts. In pursuit of that goal, we have been renders a weaker central bank.” In a recent Wall investing in research that addresses these Street Journal op-ed, Michael Belongia of the always strive to issues and the racial inequities that result.” University of Mississippi and Peter Ireland of understand forces Lately, the connection between mone- Boston College voiced similar concerns about Fed that plausibly tary policy and economic inclusion has drawn activities in the area of income inequality. -
Researchupdate
www.newyorkfed.org/research ReseResearcharchUUPDATEPDATE federalFederal reserve reserve bank bank of of new new york York ■ ■ Number Number 2, 3, 2012 2009 Research and Statistics Group www.newyorkfed.org/researchwww.newyorkfed.org/research Two Research Series Examine Recent Changes in Banking n July, the Research Group published a special The five articles that follow explore the idea of volume of the Economic Policy Review (EPR) bank adaptation in more depth, presenting arguments and a companion series of Liberty Street and findings associated with the volume’s emphasis on Economics blog posts on the evolution of intermediation roles and changes in bank structure. Ibanking since the advent of asset securitization. In “The Rise of the Originate-to-Distribute The project came out of discussions within the Model and the Role of Banks in Financial Intermedia- Group about “shadow banks” and their role in the tion,” Vitaly Bord and João Santos show that banks 2007-09 financial crisis. The consensus was that it is indeed play a much more important part in lending no longer obvious what banks really do and to what than what the balance sheet suggests. Moreover, bank extent they are still central to the process of financial actions have actually spurred the growth of shadow intermediation. Getting a better under- banks involved in the subsequent steps of the credit The main finding standing of these issues is important from intermediation chain. of the studies an academic perspective, but the insights Benjamin Mandel, Donald Morgan, and is that financial gained from the exercise could also prove Chenyang Wei next analyze the importance of banks intermediation is in useful in a practical sense for policymakers. -
Money Creation in the Modern Economy
14 Quarterly Bulletin 2014 Q1 Money creation in the modern economy By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.(1) This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’. Overview In the modern economy, most money takes the form of bank low and stable inflation. In normal times, the Bank of deposits. But how those bank deposits are created is often England implements monetary policy by setting the interest misunderstood: the principal way is through commercial rate on central bank reserves. This then influences a range of banks making loans. Whenever a bank makes a loan, it interest rates in the economy, including those on bank loans. simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. In exceptional circumstances, when interest rates are at their effective lower bound, money creation and spending in the The reality of how money is created today differs from the economy may still be too low to be consistent with the description found in some economics textbooks: central bank’s monetary policy objectives. -
Live from Atlanta, It's the Ben Bernanke Show
Live from Atlanta, It’s the Ben Bernanke Show By Sherilyn D. Narker Federal Reserve Bank of Atlanta Lesson Plan of the Year Contest, 2007–2008 First Place LESSON DESCRIPTION This three-day lesson can be used as a review activity for a macroeconomics unit or as a supplement to a classroom discussion of how the Federal Reserve’s Monetary Policy affects individuals’ lives. Students first review economic terms by conducting a Web search, either individually or in groups, depending on the availability of computers. Students then work in groups of about three to five people, and use the most recent Beige Book information from the Atlanta Fed district to research economic conditions. (Any district can be substituted for the Atlanta district). The student groups create different characters who perform in a hypothetical talk show, which is fictionally proposed by the chairman of the Federal Reserve, Ben Bernanke, as a way of informing young people about the importance of the Federal Reserve in their lives. The teacher or an adult playing the role of Dr. Bernanke will participate in the talk show presented by the students, and ask them to describe, using correct economic terms, how their lives are affected by economic conditions in their district. BACKGROUND INFORMATION The Federal Reserve System (the FED) is the central banking system of the United States. The major goals of the FED are full employment, price stability, and sustainable economic growth. The functions of the FED are supervising and regulating banks, providing financial services, and conducting monetary policy. The Federal Reserve System is composed of three divisions—a seven-member Board of Governors; the 12-member Federal Open Market Committee (FOMC), which is responsible for conducting monetary policy through open market operations, the discount rate, and reserve requirements; and 12 regional Federal Reserve Banks, each of which has its own district and is located in a major U.S. -
Annual Report 2014–15 © 2015 National Council of Applied Economic Research
National Council of Applied Economic Research Annual Report Annual Report 2014–15 2014–15 National Council of Applied Economic Research Annual Report 2014–15 © 2015 National Council of Applied Economic Research August 2015 Published by Dr Anil K. Sharma Secretary & Head Operations and Senior Fellow National Council of Applied Economic Research Parisila Bhawan, 11 Indraprastha Estate New Delhi 110 002 Telephone: +91-11-2337-9861 to 3 Fax: +91-11-2337-0164 Email: [email protected] www.ncaer.org Compiled by Jagbir Singh Punia Coordinator, Publications Unit ii | NCAER Annual Report 2014-15 NCAER | Quality . Relevance . Impact The National Council of Applied Economic Research, or NCAER as it is more commonly known, is India’s oldest and largest independent, non-profit, economic policy research institute. It is also one of a handful of think tanks globally that combine rigorous analysis and policy outreach with deep data collection capabilities, especially for household surveys. NCAER’s work falls into four thematic NCAER’s roots lie in Prime Minister areas: Nehru’s early vision of a newly- independent India needing independent • Growth, macroeconomics, trade, institutions as sounding boards for international finance, and economic the government and the private sector. policy; Remarkably for its time, NCAER was • The investment climate, industry, started in 1956 as a public-private domestic finance, infrastructure, labour, partnership, both catering to and funded and urban; by government and industry. NCAER’s • Agriculture, natural resource first Governing Body included the entire management, and the environment; and Cabinet of economics ministers and • Poverty, human development, equity, the leading lights of the private sector, gender, and consumer behaviour. -
Senate Banking Committee Hearing: Federal Reserve Nominees 5.15.2018
Senate Banking Committee Hearing: Federal Reserve Nominees 5.15.2018 On May 15th, the Senate Banking Committee held a hearing to consider the following nominations: The Honorable Richard Clarida, of Connecticut, to be a Member and Vice Chairman of the Board of Governors of the Federal Reserve System Ms. Michelle Bowman, of Kansas, to be a Member of the Board of Governors of the Federal Reserve System Key Takeaways Both nominees expressed support for the tailoring of financial regulation to the size and complexity of the institution, but highlighted the need to continue to ensure safety and soundness in the financial system. Both nominees expressed support for the continued normalization of the Fed’s balance sheet. Democratic Members asked nominees about recent Federal Reserve proposals that would adjust capital standards. The following themes consistently emerged throughout the hearing: Tailoring of regulations o Chairman Crapo (R-ID) asked the nominees their thoughts on tailoring regulations to the size and complexity of individual institutions. Clarida said that tailoring and efficiency of regulations are important goals while at the same time continuing to ensure the safety and soundness of the financial system. Bowman highlighted the need to apply the appropriate amount of regulation depending on size and complexity of the institution. o Senator Tillis (R-NC) asked witnesses about whether S.2155 was an appropriate way to tailor regulations. Bowman discussed the importance of tailoring regulations but did not specifically discuss 2155. Fed balance sheet / Quantitative Easing o Chairman Crapo (R-ID) asked the nominees about normalization of the Fed balance sheet. Clarida said that Fed Chairman Powell’s recent proposal seems to make sense, but he has not studied the numbers in detail yet.