Financial Markets and Institutions - Test

Overview, Objectives and Readings Page 1 of 1

Overview

Monetary policy is the means by which the Federal Reserve attempts to achieve its policy goals. This week we'll be exploring how the Fed uses its control of the nation's money supply in an effort to keep inflation in check, stimulate or slow economic activity, and promote job creation. This is a challenging task, for which the Fed has developed precise targets and specific processes. As you can imagine, promoting economic growth while maintaining price stability can be difficult under the best of circumstances.

As with last week's lecture, there's quite a lot of technical information, but I believe you'll find open market operations to be a fascinating process, well worth the time taken to learn the details. You're already familiar with the basic structure of the Fed and aware that the Federal Open Market Committee is arguably the single most powerful monetary authority in the world. In this lecture, we'll be learning more about what the FOMC intends to accomplish through its monetary policy initiatives.

Objectives

After completing this module, you should be familiar with:

• How the Fed uses its control of the nation's money supply to promote price stability and sustainable economic growth

• Monetary policy targets and the tools available to assist the Fed in accomplishing its mandate

O Walsh College, All rights reserved

Readings

• Read chapter 10 in Financial Markets and Institutions, 2nd Edition by Burton, Nesiba, and Brown

• Begin reading chapters 7 through 11 and the epilogue in And Then the Roof Caved In by Faber

https://ool-content.walshcollege.edu/CourseFiles/FIN/FIN310/ssholty/FA 14/Week07/00... 11 /22/2017

Monetary Policy: Goals, Targets,

and Tools

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Monetary Policy: Goals, Targets,

and Tools

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Lecture Overview

(onetary policy ~~ED STgp

- Goals ;~~~l~ ~~ ; - Targets Tools

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2. pen market operation< <RESERv~

3. Monetary policy effectiveness

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Introduction to Monetary Policy

Monetary Policy -the means by which the -Price stability

Federal Reserve -Economic growth

attempts to achieve its -Full employment

policy goals

Two federal laws make -Employment Act of

these goals mandatory f~ 1946

- Humphrey-Hawkins and provide policy ~ Ful l Employment and guidelines. Balanced Growth Act

Must pursue all policy goals of 1978

I ntroduction to Monetary Policy

The Fed uses its control of the nation's l money supply in an effortto.

~., :.~ uneep innauon m cnecrc '

❑Stimulate or slow economic ~ ~~ '~,.",

activity -,, ~.

❑Promote the creation of jobs

. -. ~,, ° ti;

I ntroduction to Monetary Policy

■ Monetary policy influences: ❑Prices of U.S. goods and services ❑ Capital investment

❑ Consumer spending

❑ Economic output

❑ Employment

❑Stock and bond values

❑The solvency of the banking system

❑The balance of trade and foreign exchange

Conceptual Overview of the Policy Process

Policy Goals --'~'., Guidej•Stable Prices ~>

PoIlcy Actic

•Sustainable GDP Growth •Full Employment

n J ~

•Satisfactory External Balance

;.Alters

Expected Economic Pertormance

~' Spending

Alter.,~~Saving

"'~ ~ "' Borrowing Lending

Monetary Policy Goals

The FMOC j ■Discuss economic meets ! conditions

approximately ■Determine monetary

every six I~~~`",/~ policy goals

■ Issue policy directives weeks to:

~ -fi:l 1' Monetary Policy Goals

Extensive ' deliberations take place at FOMCs j' February and ,f July meetings ~ `

These meetings occur immediately prior to the chairman's report to Congress, required by Humphrey-Hawkins to occur twice per year

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~' Monetary Policy Goals

■ At the time the Humphrey-Hawkins was passed:

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Stagflation ~ ~~~

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~ '4

Monetary Policy Goals

Sustainable Economic Growth Lon Run (Determined by the growth and

roductivit of labor and capital

Short Run , Full Employment

Stable Prices

Satisfactory External Balance

Monetary Policy Goals

~~ Full Employment

Short Run ~4-5% Unemployment)

Stable Prices —inflation is ignored

(2.5%- 3°/a inflation)

~̀ Satisfactory External Balance ~.~ _, (Compatible with full ~~ ~ employment and stable prices)

t i

~ . '

~'' ~Annatary POIICy Tat"getS

~ —

• Lange -Ultimate policy goals

-Price stability -Economic growth - Full employment

~ • ~diate —Market interest rates

~' ing—Fed funds rate

~ ' ~MllYlPtaY\/ Policy Targets

~ ing Target -Fed funds rate

. ~"" ...r

sdiate—Market interest rates

~ ̀ Inge— Ultimate policy goals

~.

Monetary Policy Targets

'~ ~~~,, 1970s and 1980s intermediate targets

~'~' y aggregates M1, M2,M3 and DNFD .r

Since 1993 intermediate targets

raj interest rates r

Highly correlated with economic activity - Especially responsive to changes in the fed funds rate

Fed funds rate —Operating target v

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,_~-

Monetary Policy Targets ~dE,~ rgrF J~ ~i ~

Influence the economy through raising or lowering market interest rates.

o :~i ~~ ti ~.y`_~~,.~.~'y'y ~gESEP`~~

_

Slows economic output

Recession

Over heated

Stimulates economic output

~'~Monetary Policy Tools

The Fed has three tools available by which to i mplement monetary policy:

1. Setting reserve requirements

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Monetary Policy Tools

Each of these influences:

2 ~~ ~ ~~ ~ ~~~_ ~,

Avallabilityof loanable funds Market interest rates

• The Fed uses its control of the money supply to either expand or contract the availability of loanable funds

.0

Monetary Policy Tools

1. Setting the legal reserve requirement

Changing the reserve requirement is potent, but imprecise —therefore infrequently used ___. __ ___ ~ ~

~F ~.

~~ ~ ~' s

~ ..

Precision and care are critical when it comes to affecting interest rates.

Monetary Policy Tools 2, Setting the discount rate

❑The rate of interest on funds borrowed from federal reserve district banks

::, -, thale~t

:~ .; — Today, federal reserve loans are advances made to borrowing banks with both the principal and interest due at maturity.

Monetar Polic Tools 2. Setting the discount rate

❑ Recommended by the 12 district banks, but ultimately determined by the Board of Governors

❑ Discount borrowings are small and seasonal and have little impact upon overall market interest rates

Lowest rate of interest in the U.S economy. ;.'~... _

Total bank borrowing at the discount window are small and seasonal and actual lending rates are determined by the overall availability of money and credits for borrowers in the market.

Monetary Policy Tools

2. Setting the discount rate

_ ;~; All banks are eligible for discount lending

❑ Banks are supposed to borrow at the discount window only when they are short of reserves due to temporary, seasonal factors

Monetary Policy Tools 2. Setting the discount rate 1

~.~ .

f ̀E .,~.,

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❑ Loans made at the discount window are going to be tied to fed audits or fed operational influence

Appropriate way Inappropriate way

~ ` Monetary Policy Tools

3. Conducting open market operations

J

~', ~ The buying and selling of U.S. treasury ~., securities in the financial markets ,̀ ,~

~,~'» Targets the fed funds rate of borrowing to influence overall market interest rates

Fed has engaged in Open market was

~fl open market activitfes eslabllsh ed In

_ since the l~~O~TM 7936

~.

~ Monetary Policy Tools Fed Funds

❑ Funds rouunery borrowed by banKs from each other to meet shortfalls in daily reserve requirements

~J ~ ,~~, ~ Interest rate charged for these overnight

~ loans is called the fed funds rate

Federal Funds Loans

Monetary Policy Tools Fed Funds Rate:

❑Passed along to bank customers as part of other loans _-:_

❑ Powerful impact upon market intere !

~ Prime_ Lending ~ Home Mortgage ~_ , Credit Card ~

❑ Established indirectly by the FOM( open market operations

❑ Carefully managing the amount of loanable funds, the Fed can achieve its targeted fed funds rate and influence overall market interest rates

Open Market Operations

■

Content Author: Gre Todd Ciick Q to begin presentation.

■ '_ ~; ~'

Open Market Operations

The FOMC ~ ̀ \ ~ s

Assesses current economic _ ~ ~ '~~~ " conditions in light of its ° _, olio _ozl '~ "' ~~

Decides upon the targeted ted funds rate of interest

❑ Issues a policy directive to the trading desk of the

New York Federal Reserve Bank (2ntl District Bank) . To conduct open market operations [owerdmee[ina tha [argeled fed

funds rate . The Desk will continue to conduct open market operations until the

next FMOC meeting six weeks later

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Open Market Operations , o ~.~

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.

■ Goal: Decrease the fed funds rate to expand the loanable funds to the economy

Three Players in Open Market Operations

• Federal Reserve • Securities Dealers Network • Commercial Banks

~,

Open Market Operations

~~~

~ : ,w~_

■ Goal: This is to buy U.S. government securities in the open market

The desk will place orders for those securities ~`} with the approved securities dealers network.

The dealers will either sell securities from their own portfolios or buy them market place from

~,

Open Market Operations v''`' i ___}: '' ~! ~ a

■ The fed has increased the reserves of those banks by creating additional checkable deposits

The commercial banks now have more money to lend to borrowers.

~/

~':

Open Market Operations ■ Recall: This lending takes place through

fractional reserve banking

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~° ~~~~~ ~ ~-,~ ~

,, -~

2

■ ~~

Open Market Operations Goal: Expand the money supply to lower fed fund rates

1. Dealers sell securities to the Fed and receive payment from the Fed

2. Dealers deposit payment checks at their commercial banks

3. Commercial banks send checks to the Fed where checks are cleared and credited to commercial bank accounts

j At a reserve ratio of 10°/, for every $1 of ~ securities purchased by the Fed, the money s~~ppiy expands by $10------------------

■ :~s~.__

Open Market Operations Assume: Fed wants to cool down the economy by raising interest rates

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To sell U.S. government securities to the open market

The desk is going to sell those securities from its portfolio to its approved dealer network

•~- •~- •

The dealers will then pay for those secuHties by issuing checks to the New York District Bank

The fed is then going fo casfi those checks at the dealers commercial banks.

_ _. ~ ~ ~ ~ ~ _:~"

Open Market Operations

■ Recall: This lending takes place through fractional reserve banking

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Open Market Operations Goal: Contract the money supply to raise fed fund rates

i. Dealers buy securities from the Fed and write checks as payment

z. Fed cashes the checks from the dealers

s. Commercial banks debit the dealer checking accounts, recording a withdrawal of funds

At a~ reserve ratio of 10 % ,for every $1 of securities sold by the Fed, the money supply contracts by $10

0

Open Market Operations

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Source: Federal Reserve Bank of New Vork

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•~ Open Market Operations ~' r~~,=~x<~x.~.<

■Recall: Under press Release E Alan Greenspan "'""u"'`'~~ the fed has made

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Open Market Operations

■ Voting was °~T~ unanimous to

,jj maintain the fed ~ ~. Q funds rate at 1

Open Market Operations ~.,~. K.~.~. N(~ it LF:~ JvwWY I0.1N!

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Committee expresses its commitment to use: • Use purchases of agency debt • Use purchases of mortgage backed securities • Support "credit markets and economic activity"

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early three e raised him with ~aiilc as he ~uiation. A6

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'ettd over en. McCain o Egypt. A8

titles said ~011 1'lOt 111

died was a pe of 30' ors. A15

rkedthe .f the space- im the first the Earth.

claims for re on tap.

Depai~t- iome sales

of Michi- al reading timent for

~. 25

ministers ;ers meet in

id in corporate

companies targeting gas, reflect- ~es. The :•geting natu- iged to ling tech- ng hydraulic ( a warm to a glut in plies. Mean- iddle East lriven up the king it more •fillers.

_om

their uonas o[ Ss.S-ro—~u~~C «<n,~

the 50~ write-down that ]tad

been conceded Uefore the meet-

ing..The Institute of Interna-

tional Finance, which represents

bondholders, couldn't be reached

foc immediate comment. According to officials, Greece

would also benefit fi•om an ar-

rangement in which the EL1P0-

pean Central Bank would clistrib-

ute profits on its estimated €45

billion to €50 billion holdings of

bonds it bought in the secondary

market in 2010-11 to euro-zone

governments, wluch wotdd agree

to use them to aid Greece. Am

other proposal for national cen-

tral Uanks to participate in the

private-debt restructuring was

rejected, the officials said.

The ministers also agreed to a

further reduction in interest

rates on the X56 billion in loans

from the etiro zone made as parC

of the first bailout agreed u pon

in May 2010.

Even with the agreement,

economists expect the deal will

leave longer-term questions

about Greece's aUility to pay off

even its reduced debt burden.

The Iuternatioual Monetary

Fund, which will also make a fi-

J ~ 'A~, ~~ , f~ A

t

BY VICTORIA MCGRANE completely without public meet-

AND JON HiLSEIYRATH prl~1~~8 ~~C1510YIS ings. Rather than discussing

Federal Reserve public rules and voting in public, as is

The Federal Reserve leas oper- done at other agencies with

ated almost entirely Uehind meetings hi h th F cl ft ll U • tes

closed doors as it rewrites the 30 •• ~~ ~•••••••••~•

rule book governing the U.S. fi-

nancial system, a stark contrast ~

with its push for transparency in 20 - • •~~ •~

its interest-rate policies and

emer enc -lendin g ~~~g y g pro rams. .;.~ •may

While nian Americans ma to ~-=

not realize it, the Fed has taken

on a much larger regulatory role

than at any time in history. Since o

the Dodd-Frank financial over- 198os

haul became law in July 2010, Source: Federal Reserve the Fed has held 47 separate The Wall Street Journal votes on financial regulations,

and scores more are coming. In

the process it is reshaping the U.S. fviancial in dtis-

try by directing banks on how much capital th ey

must hold, what kind of trading they tali en gage

in and what kind of fees they can charge retaile rs

on deUit-card transactions.

The Fed is making these sweeping changes—t he

most dramatic since the Great Depressio n—almost

w e e e o en co a oia ,

...•••.•..•••••.•..••.••. Fed Chairman Ben Bernanl< e and

the Fed's four other governors

have held just two puUlic meet-

•~•~••••••~•••••••••••••• ings since July 2010. On 45 of 47

of the draft or final regulatory

measures during that period,

• • ••••••••••••••••• they have emailed their votes to

.;;, the central bank's secretary.

?:~_ ~ The votes, in turn, weren't

'̀~` '~'`'X publicly disclosed until l ast

z000s week, after The Wall Street

Journal requested the informa-

tion for this article. On Feb, 14,

for the first time, the Fed posted

on its website the names of the

Fecl governors voting for or against each closed -

door regtilatoiy action on Dodd-Frank since July Please tivn topageAl6

O Current Account: Fixing the Volcker rule .................. Cl

♦ Cap(tal One deal was test of Dodd-Frank ................ C3 e Heard on the Street: China could fuel inflation.... C8

frog Hail- to Woolies: Dlcst Bunnies b~ ~~3 Other Karnes

Regional Dictionary Travels America; New Engl and's Willywags

BY RYA(V SAGER

What do you call those soft

rolls of dust that collect on the

floor wider yo~u~ bed? Many peo-

ple know them as dust bunnies.

But in parts of the Northeast,

you'd call them dust kitties; in

the South, house moss; in Penn-

sylvania, you might call them

woolies. There are, in fact, at least 174

names by which Americans call

these bits of fluff, including

cousin in Madison who con-

ceived the DictionaLy of Ameri-

can Regional English (known as

DARE) in a 1962 speech to the

Attlerican Dialect Soci- ety. Mr. Cassidy died in

2000, at the age of ~J2, having made it to "0" in his quest to catalog American English in all its rip-staving (thlt is Ozarlcian for rip-roar- ing) regional diversity.

its chief editor after Mr.

Cassidy's death. In March, Har-

vard University Press will ptib-

lish the Dictionary's Volume V, finishing off the alpha- bet with slab through zydeco, nearly half a century after the first

fieldworkers fanned

out in "1iVord Wagons"

to 1,002 communities

across America, achtun-

istering a 1,600-item

questionnaire to some-

times-suspicious, of-

nancial contribution to the bail-

out, suggested in a confidential

report that the Greek program Plense ttn•n to pageAl2

~ Bond swap shrugged off....... Al2

♦ EU banks stash cash ................... Cl

~~1 ~~9~ ~,~e

~~~~rr~~

~O ~t~~~ BY KATE O'ICEEFFE

AND ALEXANDRA BERZON

A partnership that built two

Macau casinos that together

bring in three-quarters as much

revenue as the entire Las Vegas

Strip ended in the middle of the

night with an email. Bearing the subject line, "For

Okada," the Sunday morning

email informed Japanese gam-

bling tycoon Kazuo Okada that

Steve Wynn was dumping him

and that Wynn Resorts Ltd. was

forcibly buying out his 20~ stake

at a big discount. What's more,

Mr. Okada wouldn't get the bulk

of his cash for 10 years. A fery hours earlier; Mi: Okada

had been sitting in a hotel con-

ference room in South Korea lis-

tening over the phone as the

Wynn board i►i Las Vegas heard accusatioi~us from a private inves- tigator that Mr. Okada had made improper payments to gambling regulators in the Philippines. When he couldn't understand the tra~lslation of the meeting, Mr. Okada began shouting dw•ing the call, accorcling to a person famil• iar with the call.

On Monday, Mr. Okada said he would sue to block the board': "outrageous" action acid accuse< it of operating like a "star cham bei:" A spokesman for Wynn Re sorts followed with a terse state meat: "Mr. Okada's challenges t~ the board process are a despei ate attempt to divert atteutio from his misdeeds."

The clisagreement is the late: iii a boardroom battle that fir: burst into the open in Jam~ar when Mr. Okada sued Wynn RE

~.~`;,-

`, • ~~~1

~p ~, > .

~ ~~~ ~~ti r .a:

";~=;r~ ~ e; .

The IMF's Christine Lagarde talks with Greel< Premier Lucas Papademos before Monda

y's meeting in Brussels.

.~~~ ~~°ite~ ~we~e~~~~ ~~~~~a~~,~ial uses ire 1~~~Uate 1V1eetLngs ConlinuedhomPngeOne

The Fed's appeoach to regula• uuich of their supervisory au-

zoto, when diet la~v was en• Behind Closed Doors tory role-writing is nevetYheless thority ro their staff, he said.

acted. The Fed isn't breaking any

Fed offlclals and staff meet regularly with bank, trade and Interest groups to di scuss rules the central

striking In the ~vnke of demands by Congress and the Supreme

"Governors have the responsi- bWty end Uiey sl~oidd be actively

laws by not havigg open mesa bank is writing. Here's a breakdown of such meetings on two bi g proposals. Cowt in 2010 tl~at Forced the Fed involved

and not merely looking

logs. But It is breaking from a to disclose wLich baNcs got its at staff documents hi their of-

long tradition of airing regula- The Volcker rule DeYiva tives

emergency loans during the fi- Cces," Mr. Bradfield said. He re-

tory matters at open meetings. B1pa~Ylsan critics—Guluding law-

Named for former Fed Chairman Paul Dodd-Frank extends for the first time

»social crisis.

A~~d it differs from that of called mime~ous occasions when he ivas at [he Fed and then•

makers and former regulators— Volcker, ft is a provision of Dodd-Frank that comprehensive re

gulation oFover-the-counter other top financial regulators. Chairman Volcker clanged the

say the Fed's cloistered apptroach seeks to ban banks from making risky bets derivatives, which

are contracts whose value The Federal Deposit Insurance Uoard's view on an issue tJvougli

deprives the public of insight evith their own capital. varies wi

th the value of an underlying asset—a Corp., cite Secnrttles and Ex• "vigorous discussion" at almost

into how rules are being written commodity, a currency or same other flnandai change Commission and the weekly meetUigs devoted to b~dc

and makes it harder far Congress instrument. Commodity Futures 'fradin $ su p0IVI501y ISStlfS.

and others to hold them accotmt- u~HO GOT THE M09T MEET~HfiS_ Conmiission, each governed by a '9t makes a big differenc

e if

able for their decisions. i y ~.;, , i;. ,.~ .. ; s;. . .. i..~ i !' ••. ~ r•.~ , ,, ~ i F ;.•, ;~, ~; ~ :. ~. board or a com

mission, have all you sit down at a table and dis

"People have a right to know uid Bear the clisciusiou and hear

~~~~~~~~~~ ~e~,~?~~ 1G mectlngs ~Ig~S~~~~~~~ 1S~fdiTsi i4meeflnys held open meetings on most of the drah and final rules tltey

cuss things," he said. The Fed's nQe-writing process

the presentations and the rea- "`""

c;i ~ ; ;~i;;;. (;~i ~p;;t;~, , j;~~~~, ~i~ have consider

ed, at times with works like this: Teams of Fed

Boning for tliese rules;' Sheila debate and public dissent, ac• staff write long initial drafts of

Bair, the former chai~tivoman of Ei~~~~~~~~~ to meetings ti_j~}3{~~j');~~'1 cording to their webs

ites and rides and send governors sum- "term

the Fedeixl Deposit Lisw~unce _ '~~;~~*ids) agendas.

maries called sheets."

Copp., said lu an interview.:'All yj~~li~?13i1;i Some Fed offlclals privately With those term sheets as a

of the other agencies which are sjt~ (~j; ~; ~9~~~~~''~~c`~. E~ 12meetinys each complain [hat the more public giude, Fed staff meet with

gover-

governed by boards or commis- rule•wriNng app~vach at other nors, usually one at a time, to

sions propose and approve tUese ~~~~~t~~~ 9 meetings i - i.: -

r agencies is often inefficient. The present options and solicit feed-

iYiles Li public meetings;' she "t ~=`+ ti:

~ ':~r~a~ `~;'~ cUallenge 1n schedWing meetings,

is by back. Fa• odes dealing with the biggest banks, Mr. Tarullo

said. think it would be in the i ~ ~,1 t ~, ;~ ~ ~c.~ they say, complicated the

geuer-

Fed's Ltterest to do so as we1V' ~~/~lr1;t;::1!Ic~`.:,liF', ~':~lC!t>7~i1.`.~~~?`1~~)+

:t~%~:.~`.rrC-~ fact that many rules are being

by ally decides when a ode is ready

TlieFed'srecentapproachto wr[tten several agencies at togorothefullboardforavote.

m•iting financial regulations is ~~~~~,~~ 7meetingseac h _;~~~~~~~€~~~~ 1l meetings each tl~esametlme

. TLeFedhasapproved47regida-

very cliffeirent fiom its practice in "Foy' Lthe Fed1 to be account- lay measures since lat

e 2010,

the 1fl80s and 1~J~JOs, when (t so u:: c=a:,ai ane~,~ /ht Y/all $Ife9[ IWI03I able, they've got to air and c

Us- accm•digq to law firm Davis Polk

held es many as 31 public meet- cuss and debate their view- &Wardwell LLP.

logs a year, according to data pohits," Bald Sea. R[chard Shelby The Volcker ~vte vote was the

provided by the Fed. The gover- tas to enforce. She also worried eng agement at all;' Mr. Tacullo the public and its elected repre- of Ala

bama, file top-rank~ig Re• only closed•door vote in which a

nors publicly discussed not only that soots of the exemptions said. sentaUves, and transparent hi its publican on the Senate Banking governor

formally cUssented, ac-

regu(ations, bnt also obscure were written too broadly. She O pen meetings wuld also policies;' Mc Becnanke sa(d Commit

tee, who supported strip• cording to Fed records. But some

matters, tike how much to spend said she had ample opportunity stra in die Tlready Uusy scl~edtiles about moitete~y policymakLig in ping fi

le Fed of its supervisory observers believe open meetings

on portraits of former chairmen. to talk through her views during of t op Fed officials. Tl~e Fed cur- a 2010 speech. author

ity when Congress was coidd reveal more m~anced dif-

That bean stowing In the late the drafting process. rently h as 250 separate rule- Federal Reserve officials argue writing Dod

d-Finiilc. The Fed ferences. "Do they all have the

1~J90s and fell sharply in the Her dissent is significant be- wri ting projects wider way. [hat U~eir aria-uniting process is fought hard

to keep its powers. same view every day? Obviously

2000s, and now such meetings cause regulators are still uniting "Com pared to other waves of alreTdy transparent. The Fed "The Fed's

record shows, among not. Do they have the same ap-

iarely occur. the rule and her views could in• rule makin g this is a tsunami;' generally gives the public GO to other things,

tliat it's not infant• proach to economics? Obviously

Fed offlcfals contend they al- fm•m ba~ilcs, industry groups and said J ohn Weinberg, Bead of re- ~JO days to comment on its pro- ble. Look at the

housing crisis," not;' said Mr. Shelby, ttie Na-

low plenty of sm~ight into their otUers ns they engage with the search at the Federal Reserve posed measures, longer than in he sa[d.

bama senator.

regulatory deliberations, birt Fed to shape the measiu•e, say Baiil c of Richmond. The seven- die past. Banks and others inter• Under

federal "simsl~ie" laws, OUier regiilators have recently

~ open meetings, which tend to be veterans of the revelatory pro• member Fed board ciurently Ices ested in Fed ~vle•vniting say no more

than tliree Fed board moved toward greater transpar-

scripted and are sometimes per- cess. The deadline for co~mnents two vacancies. they have frequent closed•door memUers

can meet witliout for• ency. l7ie CFTC, for instance, has

hmeto~}; don't ahvays add value on the Volcker proposal was Feb. M c Taru~to said he has asked meetings with Fed o~ctals to ex- oral notice quid

opening the Bath• pubitcly discussed more than

to the process. Sver•growing de- 13, ha~vever, so it is too late For For open meetings ai several fi• press their views. Paiticipatts (n ering to the

public, unless it 9045 of the 60 or so proposed

mends on governors' time has letters to be informed by liar dis- nal rules. A request floor any those meetings are disclosed on meets one of

several exemptions. Dodd-Fra~ilc rules it has issued

made it Harder to coordinate sent.'? would have liked to have go vernor means ~i open meeting file Fed's ~vebsite, a new pracflce For uist~uue,

meetings on the su- and all but a handful of the final

~ schedules to allow for frequent heard that discussion:' said Sen. mist be held. peivisiott o

f banks and other Ci- rules, Gary Gensler, the agency's

meetings than in past decades. Bob Corker (R., Tenn.>, a leading The Fed's method of writing na~xial instit

utions for wldch [he chairma~~ estimated. That is after

Hiey arid, critic of the Volcker rule, when odes far the finTucial industry The Fed's closed-door Fed is responsible can be closed years of

practically no open

a The Fed's closed•door process informed of Ms. Buskin's dissent. contrasts with the way its policy Process has obscured

because tits discussia~ inchides meetings before Mr. Gensler ar-

Uas obscured internal disagree- The official directing the Fed's com mittee—the Federal Open confidential I

nformation about rived in 2009.

meat on at least ale big issue. rule-writing efFo~•t, Daniel Tnr- Niarke[ Committee, comUrising internal disagreement specific companies. But the Fed The CF

TC also has convened

Lost October; Fed Covei~ior Sazah olio, a governor appointed by the seven Fecl governors and five on at least one big issue,

governors don't reg~ilarly meet more Ulan a dozen public round-

Bloom Raskin dissented when Uie Fed issued a proposed reg~dation

Pirsldent Ba~ack Olkvna, said the

central Uank shoidd have dis- Reserve Bank presidents—sets interest rates. Although their _ : _e saw=~u;,•x,~~sz-~=~

for discussions on supervisory matters either.

tables—several with the SEC—in tvhicl~ staff and market partici-

~ i~upleu~enting the conu~oversial closed IVis. Buskin's dissenting sessions are closed ro the public, The goveenors

do meet on pants debate aspects of major

Volcker ~vle, wi~ich woidd re- opinion in the Volcker rule. '7 that group has regularly sched• adopted after the passage of monetary pol

icy—another ex- rule-mak[ng, all streamed live to

strict U.S. banks from making can't thhik of any justlfication" ul ed meetings on interest rates Dodd•F~•enk. sorption Erm

a sunsiilne laws. Out the pubitc via the ~iternet.

° bets wttli their own capital. for not disclosing Ms. Buskin's and in-p erson votes, intense clir Fed officials say they are of 61 closed-door

meetings held The FDIC has opened up mesa

b7s. Buskin's dissent, which dissent, he said in an interview cussim i and prompt disclosw~e called to testify before Congress sGice the start of

2010, the vast logs of an advisory committee

Bile cast by entail, wasn't publicly before the vote tallies were about h oiv individuals voted and and are grilled on the status of maJo~ity have bee

n on tl~at topic. created to coiuisel the agency on

clisclosed by the Fed wail Feb. posted on the website. "When the reasons for any dissent. N[r. conhoversinl regidations as they They have met

10 tunes over the tl~e new power to seize and dis-

14. Neither she nor the central there is a dissent from any vote Bernaiilce has pushed the Ped to are writing them. same period to d

iscuss supervi- mantle large, failing financial

bank has publicly explained her it has got to be noted," lie said, be more ope n on interest-rate Mr. Tarullo Bald the Fed has sory issues, accor

ding to an vial- lions, a central plank of Dodd-

reasons for dissenting to the and the practice of not publish- policy, by m2king public its inter• been more transparent on regu- ysis of agendas on

the Fed web• Frank law. At its daylong Ja i. 25

draft rule, wldeh the Fed is Twit- ing such internal dissents "has nal economic and i nteres[•rate latory issues hi other ways. For site.

meeting, FDIC staff made pressor

i~ig wSth severnl other regidators. got to be changed in my view." proJectiais. Fle holds quarterly instance, in 2009 the Fed dis- Michael Bradfield,

who served tations on hav they see key ar

Ms. Raskin said in an inter- More biroadly, Mc Tandlo Bald news conferences to explain Use closed details of its findings from as Fed general couns

el between pacts of its new authority work-

vfew that Bile was concerned Uiat open meetings aren't always the convnittee's d ecisions and think- "stress tests" on the nation's 1981 end 1989, said

he is troubled ing. They fielded questions and

the draft rule, mandated by most effective means ro increas• ing. largest banks to determ[ne their by the Gifrequency with which criticism

from advisory mem-

Dodd-Fraiilc and named for for- ing public imderstandiug, and "As an agent of the govern- abiNty to wiUtstand severe the Fed board catvenes m

eet- bars—financial executives, for-

mer Fed Chairman Paul Volcker, they aren't a gauge of regidatms' roent, a central baNc must be ar strains in the financial system. It logs, closed or open, to

consider mar regulators and academics.

would be too wiwieldy for ba~il:s work. "You can have a scripted cowitabte in the pw suit of its plans to publish results from supervisory matters. The gove

r- Fed staff attended but didn't

to comply with and for regiila- meeting tliat does not shop+~ any nt2ndated goals, responsive to tests being done this year, too. nors are in effect delegat

ing speak.

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~

i3 `i ~ ~ ~ ,̀ 7 y

DOIM~NF.S ~ * * ̂ 'CU CSDAS', P'tiDRUARl' 2l, 2012 - POL, CCL[.l' N0. 41 W5~l.c~m ,t ~

~~ t~ 52,00

Answers to Review Questions

1. What are the goals of monetary policy? How are the goals of full eTnployment and

stable prices related to the long-run goal of economic growth?

The goals of monetary policy are to design and implement policies that will achieve maximum

sustainable economic growth in the long ~~un. To achieve this, policymakers pursue policy to

seek full employment, stable prices, and satisfactory external balances in the short run.

The goals of full employment and stable prices are related to the long-run goals of economic

growth. Stabilizing the economy in the short run at full employment and stable prices

contributes to the achievement of long run maximum sustainable growth. Thus, for the United

States to reach its economic potential, policymakers should pursue policies to achieve full

employment and stable prices in the short run.

2. How can policymakers affect long run growth?

It is believed that policymakers can affect long run growth by achieving full employment and

stable prices in the short run.

3. What is deflation, and why do policy makers have to be concerned about it?

Deflation refers to a decline in the overall price level as measured by a price index.

Policymakers have to be concerned about this phenomenon as falling prices can lead to debt

deflation, defaults, and bankruptcies. Deflation is actually more onerous than inflation because

debts are denominated in dollars and the real value of debt increases with deflation.

4. What is the recognition lag? The policy lag? The impact lag?

The recognition lag is the time elapsed between when a change occurs in the economy's

performance and when policy makers recognize that a change has occurred.

The policy lag is the time elapsed between when policy makers recognize that a change in the

economy's performance has occurred and when policy makers decide on and implement an

adjustment policy.

An impact lag is the time elapsed between when adjustment policy is implemented and when

the economy responds to the policy.

5. Are current incoming economic data or forecasts more important in guiding monetary

policy? Why?

Current economic data is more important than forecasts in guiding monetary policy.

The proportionately large forecasting errors have created a lack of confidence in forecasts;

hence, policy makers rely more heavily on current economic data than forecasts.

6. When is it most difficult to interpret incoming data? (Hint: Consider the case in

which retail sales are weak, but new orders for capital goods are strong, etc.)

It is more difficult to interpret incoming data when the collection of different individual series

of data reveals conflicting results.

7. What is policy regret? What are some of the strategies that the I+ed could use to minimize policy regret?

Policy regret is a situation in which policy actions based on available data would not lave been taken if more accurate data revisions had been available. Tl~e Fed could make snore gradual changes in policy to reduce the effect of data uncertainty on policy recommendations. Tl~e Fed could also base policy actions on data that are less responsive to highly uncertain information or the Fed could respond to data that have been averaged over several time periods.

8. Why does the Fed now establish long-term economic projections four dines a year rather than two times?

Short-term goals can differ from long-term goals. For example, if the economy is very far from the long-term goals, then an adjustment that would result in a movement to the long-term goals in tl~e short term may not be possible. Thus, the short-term goals depend on how far the economy is from the long-term goals and what can politically be feasible in the short term.

The reason tl~e Fed now establishes long-term economic projections four times a year rather than two times is to increase the openness of the Fed in an effort to more clearly communicate its take on the economy and to help the public understand the basis for changes in monetary policy. This trend for the Fed to be more open began in the 1990s because the Fed believes it will improve the policy process if the public understands the basis for changes in monetary policy.

9. What is an irregular variance? How does it affect Fed behavior?

Irregular variance is a random fluctuation in any data series that snakes any single month movement less reliable as a policy indicator then if a trend continues for several months. Irregular variance affects the behavior of Fed because it causes the Fed to wait for two to three months of data to interpret cyclical or trend movements of the economy rather than relying on month-to-month data only.

10. "The Fed should do everything it can to eliminate inflation." Do you agree? Explain

Without ignoring or jeopardizing other goals, the Fed should do everything it can to eliminate inflation. Sometimes, it may not be possible to reduce inflation without severe and politically unacceptable consequences for employment. Such a situation may result from a severe adverse supply shock causing both high unemployment and high inflation. In this case, attempts to eliminate inflation may lead to unacceptable increases in already high unemployment.

11. What should the Trading Desk do in the fed funds rate falls below the targeted rate?

If the fed funds rate falls below the target rate, the Trading Desk reduces the amount of reserves available to depository institutions in order to drive the fed funds rate back to the target level. In this case, the Trading Desk should sell government securities (open market sales).

12. Explain what is meant by the reserve need.

The reserve need is the projected amount of reserves to be supplied or withdrawn by open market operations to maintain or reach the existing levels of the Fed funds rate prescribed by the policy directive. The reserve need is estimated by the staff of the Fed.

13. Why and how has the Fed beco~nc mo►•e open about monetary policy decisions in recent years?

The Fed has become more open in recent years because it believes that if it better communicates current and future policy moves then there will be less uncertainty. The less uncertainty means more control over future expectations and through this, more control over long term interest rates. Changes in long-term interest rates have the greatest impact on economic activity and it is long-term rates that the Fed is aiming to affect through changes in short term rates.

A side effect of the new openness is that there is a smaller volume of open market operations needed to hit a given targeted fed funds rate. The smaller volume results from the Fed's announcement of the new target directly and its effect on expectations of the short-term rate.

A second side effect of the new openness seems to be a reduction in the long and variable lag for monetary policy to take effect in the economy. The conventional wisdom was that it took at least six months or more for an interest rate reduction to stimulate the economy. With the new openness of the Fed and the greater transparency, financial markets can more easily anticipate what the Fed will do and act accordingly and preemptively, thus reducing the lag.

One of the ways the Fed has become more open by announcing its long-term projections four times per year rather than twice a year in an effort to more clearly communicate its stance on monetary policy. The Fed also publishes the minutes of FOMC meetings in a more timely manner and states it belief about the state of the economy.

14. What are the special lending facilities created by the Fed in response to the financial crisis of 2007-2009? What does each do? Why were they created?

In late 2007 and early 2008 the Fed announced a series of measures to mitigate the crisis that include the establishment of a Temporary Auction Facility, a Primary Dealer Credit Facility, and a Term Securities Lending Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Lending Facility, the Money Market Investor Funding Facility, and the Term Asset-Backed Securities Loan Facility. These actions by the Fed are unprecedented attempts to prevent a widespread financial collapse.

Through the Temporary Auction Facility (TAF), the Fed directly auctions funds to all depository institutions that are eligible to borrow at the discount window. The Fed announces the amounts and timings of the auctions, and bids are accepted through the local Reserve Banks. The original term of the loans was 28 days. In August 2008, the Fed began auctioning both 28 and 84 day loans TAF funds.

Through the Primary Dealer Credit Facility (PDCF), primary dealers can borrow directly from the Fed. The new credit facility operates similar to the way that banks borrow from the Fed at the discount window. The PDCF hopes to improve the ability of primary dealers to provide funds for participants in the mortgage-backed security meltdown due to the housing crisis. The PDCF will provide overnight funding to primary dealers in exchange for a specified range of collateral that includes all Treasury and agency securities, all investment-grade corporate securities, municipal securities, mortgage-backed securities, and some asset-backed securities.

Through the Term Securities Lending Facility (TSLF) the Fed would lend up to $200 billion of Treasury securities to primary dealers for a term of 28 days, as opposed to an overnight loan under the PDCF. Auctions are held weekly and acceptable collateral includes federal agency debt and agency mortgage-backed securities, as well as non-agency mortgage-backed

securities. Although 28 day loans are currently made, the maximum term is 90 days. Tl~e minimum bid is $10 million, with $10 million increments thereafter. Note that the TSLF does not lend funds directly to primary dealers. Rather, they auction off Treasuries in exchange for less-liquid securities. Tl~e lending rate is usually between 7 and 15 basis points, which represents the price primary dealers are willing to pay for the greater liquidity. The lending fee can be thought of as approximately equivalent to the spread between the Treasuries that are borrowed and the interest rate for the less desirable pledged collateral over the term of the loan. The purpose of this lending facility is to improve the liquidity of the primary dealers who choose to participate.

The Fed created the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) for the purpose of assisting money market mutual funds that were experiencing severe disintermediation as depositors withdrew uninsured deposits. Depository institutions and bank holding companies could now borrow from this facility at the primary credit rate and use the proceeds of the loans to purchase high quality asset-backed commercial paper from money market mutual funds.

The Commercial Paper Funding Facility (CPFF) was created to support the commercial paper market at a time when it was experiencing severe strains. The volume of outstanding commercial paper lead fallen, rates on longer term paper had increased significantly, and a large amount of commercial paper had to be rolled over on an overnight basis. Investors were hesitant to purchase commercial paper, and this was further crippling financial and non- financial firms that relied on the issuance of commercial paper for their financing needs. The CPFF was designed to increase the funds to this market and to insure both issuers and investors in commercial paper that funds would be available to pay investors when newly issued commercial paper was maturing.

The Money Market Investor Funding Facility (MMIFF) supported a private plan to provide liquidity to U.S. money markets by funding the purchase of short term CDs and commercial paper from money market mutual funds and money market investors. If money market mutual funds had a liquidity squeeze from investors who wanted to redeem shares, the fund could sell short-term CDs and commercial paper to the MMIFF in order to raise the funds to meet the redemptions. The presence of such a Fed created funding facility helps to restore confidence for money market investors and increase their willingness to invest in money market instruments. The MMIFF complements the CPFF and the AMLF to improve liquidity and funding in short-term credit markets.

The Term Asset-Backed Securities Loan Facility (TALF) was designed to support the asset- backed securities markets which were collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. Under the program, the New York Fed will lend an amount up to $200 billion to the issuers of asset-backed securities. The asset-backed securities will serve as collateral for the Fed. The issuers can then use the proceeds of the loans to issue new asset-backed securities. Due to the financial crisis, new issuances of asset-backed securities had declined. Such issuances provide new funds to lending for consumer credit and SBA loans, which are vital to the adequate function of credit markets.

Note that the TAF, PDCF, and TSLF make loans to depository institutions and other financial institutions, as part of the lender of last resort function of the Fed. All provide liquidity to sound financial institutions. A second set of programs, including the AMLF, CPFF, MMIFF, and TALF support specific financial markets such as the commercial paper and the asset- backed securities markets. In addition, the Fed has also created assets on their balance sheets to assist in the bailout of Bear Stearns and American Insurance Group (AIG). Finally, the Fed has also started directly purchasing up to $500 billion of longer-term agency securities

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O p e n M a r k e t C o m m i t t e e ( F O M C ) to r ep la ce t h e O M I C , a n d t h e

F O M C c a m e t o b e t h e m o s t p o w e r f u l p o l i c y m a k i n g b o d y o f t h e

F e d e r a l R e s e r v e S y s t e m . T w e l v e v ot in g m e m b e r s m a k e u p t h e

F O M C : fi

ve p re

si de

nt s o f F e d e r a l R e s e r v e B a n k s ( m e m b e r s

ro ta

te a nn ua ll y a m o n g t h e R e s e r v e B a n k s , w it h t h e p re

si de

nt o f

th e N e w Y o r k F e d r et

ai ni

ng a p e r m a n e n t s e a t ) a n d t he

s e v e n

m e m b e r s o f t h e b o a r d o f g o v e r n o r s , w h o m a k e u p a v ot

in g

m aj

or it

y.

W it h t h e e s t a b l i s h m e n t o f t h e F O M C l es s t h a n 2 5 y e a r s a ft er i ts

o w n f or ma ti on , t h e F e d e r a l R e s e r v e S y s t e m h a d e v o l v e d b e y o n d

i t s f o u n d e r s ' f ur th es t ex pe ct at io ns : f r o m i

ts b e g i n n i n g s a s

e ss

en ti

al ly

a " b a n k e r ' s b a n k " t o o n e o f i ts

m o s t i m p o r t a n t

P a g e 2 o f 6

h tt

ps :/

/w ww

.m in

ne ap

ol is

fe d.

or g/

pu bl

ic at

io ns

/t he

-r eg

io n di

sc ov

er in

g- o p e n - m a r k e t- op er at io ns

11 / 2 2 / 2 0 1 7

D i s c o v e r i n g O p e n M a r k e t O p e r a t i o n s ~ F e d e r a l R e s e r v e B a n k o f M i n n e a p o l i s

fu n c t i o n s— e s t a b l i s h i n g t h e n at

io n'

s m o n e t a r y p ol

ic y.

I n 1 9 7 8 t h e

b o a r d o f g o v e r n o r s w a s r eq

ui re

d u n d e r t h e H u m p h r e y - H a w k i n s

A ct

t o re po rt t o C o n g r e s s t w i c e a y e a r o n t h e o bj ec ti ve s a n d p l a n s

o f t h e b o a r d a n d t h e F O M C w it

h r e s p e c t t o m o n e t a r y p ol

ic y.

T h o s e o bj ec ti ve s w e r e a d d r e s s e d i n a b r o a d s e n s e , b y P a u l

V ol ck er , c h a i r m a n o f t h e B o a r d o f G o v e r n o r s , i n a s p e e c h h e

g a v e i n 1 9 8 4 :

In du st ri al n at io ns , in

cl ud

in g o u r o w n , n o w a d a y s r el

y

h ea

vi ly — s o m e t i m e s t o o h ea vi ly — o n t he

ir c en

tr al

b a n k s a n d o n

m o n e t a r y p ol ic y to a c h i e v e o u r e c o n o m i c g o a l s : t o p r o m o t e

g r o w t h a n d e m p l o y m e n t , t o bl un t t h e f o r c e s o f i nf la ti on , a n d t o

m ai

nt ai

n fi

na nc

ia l st ab il it y. A t t i m e s , t h e p ur

su it

o f t h o s e

o bj

ec ti

ve s re

qu ir

es s p e e d a n d f le

xi bi

li ty

i n de ci si on - m a k i n g , a n d

th a t f le

xi bi

li ty

i s o n e o f t h e v ir

tu es

o f m o n e t a r y a n d c re di t po

li cy

.

B ut t h r o u g h t h e n e c e s s a r y p r o c e s s o f a d a p t a t i o n a n d c h a n g e r u n s

a no th er , m o r e c o n s t a n t , t hr ea t— t h e n e e d f or

a s e n s e o f

d is

ci pl

in e.

I n t h e b r o a d e s t s e n s e , a ll o f e c o n o m i c s — I a m t e m p t e d

to s a y a ll o f l if e— t e a c h e s u s t ha t o u r c ol

le ct

iv e d e s i r e s a l w a y s

e x c e e d t h e m e a n s t o a c h i e v e t h e m . A n d h is

to ry

h a s t a u g h t u s ,

a g a i n a n d a g a i n , t ha

t t h e c re

at io

n o f m o n e y i s n o s ub st it ut e fo

r

p ro du ct iv it y, f or

s a v i n g s , a n d f or

i n v e s t m e n t i n e n l a r g i n g o u r

e c o n o m i c w el fa re . Y e t t h e t e m p t a t i o n i s a l w a y s t h e r e t o tr y— w i t h

th e u lt im at e re

su lt

o f d es

tr uc

ti ve

i nf la ti on t ha t, i n t h e e n d , o n l y

u n d e r m i n e s t h o s e g o a l s .

In a dd it io n to o p e n m a r k e t o p e r a t i o n s , t h e F e d e r a l R e s e r v e c a n

d e t e r m i n e m o n e t a r y p ol ic y in

t w o o t h e r w a y s : b y c h a n g i n g

re s e r v e r e q u i r e m e n t s a n d t h r o u g h t h e d i s c o u n t r at

e le

ve l.

R e s e r v e r e q u i r e m e n t s a r e t h e p e r c e n t a g e o f d e p o s i t s t ha

t

fi na nc ia l in st it ut io ns a r e r eq

ui re

d to m a i n t a i n a g a i n s t d e p o s i t s .

C h a n g i n g r e s e r v e r e q u i r e m e n t s i s ah

ar d-

hi tt

in g m e a s u r e a n d i s

P a g e 3 o f 6

h tt

ps :/

/w ww

.m in

ne ap

ol is

fe d.

or g/

pu bl

ic at

io ns

/t he

-r eg

io n di

sc ov

er in

g- o p e n- m a r k e t- op

er at

io ns

1 1 / 2 2 / 2 0 1 7

Di sc ov er in g O p e n M a r k e t O pe

ra ti

on s

~ F ed er al R e s e r v e B a n k o f M i n n e a p o l i s

s e l d o m u s e d . I n t h e p a s t t h o s e r e s e r v e r e q u i r e m e n t s o nl

y ap

pl ie

d

to c er ta in a c c o u n t s i n s o m e c o m m e r c i a l b a n k s , b u t t h e D e p o s i t o r y

In st it ut io ns D er

eg ul

at io

n a n d M o n e t a r y C on

tr ol

A c t o f 1 9 8 0

e x t e n d e d r e s e r v e r e q u i r e m e n t s t o

al l de

po si

to ry

i ns

ti tu

ti on

s.

F in

al ly

, t h e t hi rd t oo

l o f m o n e t a r y p ol

ic y is t h e d i s c o u n t r at e— t h e

ra te

t h e F e d c h a r g e s t o le nd m o n e y t o fi

na nc

ia l in st it ut io ns . W h e n

a F e d e r a l R e s e r v e B a n k l e n d s m o n e y i n

it s re

gi on

t he

re i s a n

in c r e a s e i n re

se rv

es . A c h a n g e i n t h e d i s c o u n t r at e, w h i c h i s

a p p r o v e d b y t h e b o a r d o f g o v e r n o r s f ol

lo wi

ng r e c o m m e n d a t i o n b y

th e d is tr ic t b a n k s , i s s o m e t i m e s u s e d a s a n i nd ic at io n of

m o n e t a r y

p ol

ic y.

T h e F e d ' s i n v o l v e m e n t i n m o n e t a r y p ol

ic y t h r o u g h t h e y e a r s h a s

g ra

du al

ly s p a w n e d i

ts r ol

e a s a c e n t e r f or e c o n o m i c r e s e a r c h .

R e s e a r c h d e p a r t m e n t s g r e w o v e r t h e y e a r s a t t h e b o a r d o f

g o v e r n o r s a n d w it hi n e a c h d is tr ic t b a n k a s a m e a n s t o s t u d y t h e

F ed

's i n v o l v e m e n t i n t h e e c o n o m y a n d t h e r e b y i m p r o v e i ts

p e r f o r m a n c e , a n d a ls o to

e x a m i n e o th

er e c o n o m i c i ss ue s. T h e

re s e a r c h d e p a r t m e n t s o f d is tr ic t b a n k s a r e g en

er al

ly

re pr

es en

ta ti

ve , id eo lo gi ca ll y, o f t h e b a n k ' s c ur

re nt

p re si de nt . In

o th er w o r d s , g iv

en t h e i nt

er es

t o f a p ar ti cu la r pr

es id

en t,

a b a n k

m a d b e l ed

t o r e s e a r c h c er ta in t he

or ie

s o r i nv es ti ga te c er ta in

p r o b l e m s . T h e n ot io n o f t h e F e d a s a n a ct

iv e m e m b e r o f t h e

e c o n o m i c r e s e a r c h s oc

ie ty

i s a r e c e n t d e v e l o p m e n t i n t e r m s o f

th e c en

tr al

b a n k ' s h is

to ry

a n d i s b e c o m i n g o n e o f t h e c hi

ef w a y s

fo r d is

tr ic

t b a n k s t o d e v e l o p t he ir o w n p er

so na

li ty

.

T h e F ed er al R e s e r v e S y s t e m e ar ns i n c o m e , fo

r th e m o s t p ar

t, f ro

m ho

ld in

gs o f U.

S. g o v e r n m e n t s ec ur it ie s ac qu ir ed t hr

ou gh

o p e n m ar ke t

o pe

ra ti

on s,

w it h th e re

ma in

de r c o m i n g f ro

m ho

ld in

gs o f fo re ig n

c ur re nc ie s, l oa

ns t o de po si to ry i ns ti tu ti on s a n d f ee s ch ar ge d fo r

s er vi ce s pr ov id ed t o de po si to ry f in

an ci

al i ns

ti tu

ti on

s.

P a g e 4 o f 6

ht tp

s: //

ww w.

mi nn

ea po

li sf

ed .o

rg /p

ub li

ca ti

on s/

th e-

re gi

on /d

is co

ve ri

ng -o

pe n-

ma rk

et -o

pe ra

ti on

s 11

/ 2 2 / 2 0 1 7

D i s c o v e r i n g O p e n M a x k e t O p e r a t i o n s ~ F e d e r a l R e s e r v e B a n k o f M i n n e a p o l i s

In 1 9 8 7 t h e F e d r et

ur ne

d $ 1 7 . 7 b il

li on

, o r 9 1 p e r c e n t o f i ts

$ 1 9 . 4 b il li on

g r o s s e a r n i n g s , t o t h e U ni

te d S t a t e s g o v e r n m e n t , o f w h i c h $ 2 8 5

m il li on w a s c on tr ib ut ed b y t h e M i n n e a p o l i s F e d . T h e F e d p ai

d $ 1 . 1

b il li on i n o p e r a t i n g e x p e n s e s f or t h e 1 2 F e d e r a l R e s e r v e B a n k s a n d

th ei r b r a n c h e s — $ 6 2 m il

li on

f or

t h e M i n n e a p o l i s F e d — $ 8 2 m il li

on i n

e x p e n s e s f or t h e b o a r d o f g o v e r n o r s a n d $ 1 7 1 m

il li

on f or

t h e c o s t o f

c ur

re nc

y.

A ls

o, t h e F e d p ai

d $ 1 1 7 m il

li on

i n si x- p e r c e n t d i v i d e n d s t o

it s m e m b e r

b a n k s ( re qu ir ed b y l a w ) a n d p u t $ 1 7 4 m il

li on

i n

it s s u r p l u s a c c o u n t .

M in ne ap ol is F e d P r e s i d e n t G a r y S t e r n w r o t e i n t h e b a n k ' s 1 9 8 5

a n n u a l r ep or t o f t h e u n i q u e r ol

e o f t h e F e d e r a l R e s e r v e S y s t e m a s a

p o l i c y m a k e r .

" T h e s it ua ti on o f a U . S . p o l i c y m a k e r i s n o t e a s y i n a n y y ea

r. T h e F e d

h a s a s o m e w h a t v a g u e g e n e r a l o bj

ec ti

ve o f m a x i m i z i n g t h e c u r r e n t

a n d f ut ur e w e l f a r e o f s oc ie ty , w h i c h a ll p ub

li c po li cy i ns ti tu ti on s s h a r e .

C o n g r e s s h a s t ra ns la te d th at i nt

o a f e w b r o a d o p e r a t i n g g o a l s— s t a b l e

p ri ce s, h ig

h e m p l o y m e n t , a n d e c o n o m i c g r o w t h , f or

e x a m p l e — b u t

th e s e a r e n o t n ec es sa ri ly c o m p a t i b l e g o a l s , t h e F e d h a s n o d ir

ec t

c on tr ol o v e r t h e m , a n d t h e y a r e m e a s u r e d o n l y i nf re qu en tl y. ..

" W h a t ' s a p o l i c y m a k e r t o d o ? T h e F e d d o e s w h a t e c o n o m i c t h e o r y

s a y s i s b e s t f or

a d e c i s i o n - m a k e r i n th

is s it ua ti on :

It u s e s a ll t h e

in f o r m a t i o n a va il ab le a t e a c h p oi

nt i n t i m e t o m o v e a s c l o s e a s

p os

si bl

e to i ts

b r o a d g o a l s . T h i s m e a n s n o t t ar

ge ti

ng a n y t h i n g e x c e p t

th o s e g oa

ls ..

.

" T a r g e t i n g i n th is c o n t e x t m e a n s j us

t w h a t o n e m i g h t g u e s s : a i m i n g t o

h it

p ar ti cu la r va lu es .. ."

.... ....

...

T W E E T

S H A R E

P O S T

E M A I L

P R I N T

M i n n e a p o l i s F e d

A b o u t t h e F e d

P r i v a c y

B a n k i n g S u p e r v i s i o n D i s c l a i m e r

E c o n o m i c R e s e a r c h

A c c e s s i b i l i t y

O t h e r F e d e r a l R e s e r v e S y s t e m S i t e s

B o a r d o f G o v e r n o r s

K a n s a s C i t y

A tl an ta

N e w Y o r k

B o s t o n

P h i l a d e l p h i a

P a g e 5 o f 6

h o p s : / / w w w . m i n n e a p o l i s f e d . o r g / p u b l i c a t i o n s / t h e - r e g i o n d i s c o v e r i n g- o p e n - m a r k e t- o p e r a t i o n s

1 1 / 2 2 / 2 0 1 7

Di sc

ov er

in g O p e n M a r k e t O pe

ra ti

on s

~ F ed er al R e s e r v e B a n k o f M i n n e a p o l i s

R e g i o n a l E c o n o m y

G l o s s a r y

C o m m u n i t y

C a r e e r s

N e w s & E v e n t s

C o n t a c t U s

P u b l i c a t i o n s

C h i c a g o

R i c h m o n d

C l e v e l a n d

S a n F r a n c i s c o

D al la s

S t . L o u i s

lo ad in g

P a g e 6 o f 6

ht tp s: // ww w. mi nn ea po li sf ed .o rg /p ub li ca ti on s/ th e- re gi on d is

co ve

ri ng - o p e n- m a r k e t- op er at io ns

11 / 2 2 / 2 0 1 7

The Wall Street Journal

March 20, 2017

Central Bank overnight policy projections:

GLOBAL DEVELOPMENTS

1. C3~31~c~1 ECOT142T1ICS S~e~ ~~1.2 FE'C~{. ~£'.~till~ ~I05e t0 ~i. ~°JG f~'Cl ~~li1Lj.S Date over tl~e

n~~t couple of year. ~~ hike in the. UK is nc~t e~pectec until ate newt y7ear, ~~Thile

the ECB and the EoJ ja~ill stand fat on rates.

Key Nolic~ Rtes ~°!~}

;~

z

~~

~~

F~.

~,J VV ~3 V~ ~~ ~V ~ 1 ~~ !~ ~~t 1~ 1i7 ~~ IV ~~

S~u~r~::~s — Thc~m~c~n Reuters, ~~~3it~l c~nom e~

Source: capi#.ai Economics