Monetary Policy in a Model with a Federal Funds Market: Fixed versus Flexible Deposit Rates

Monetary policy is an important public policy, but it is not the only one to stabilize our economy and reduce its business cycles. The leading central bank, the Federal Reserve of the U.S., has introduced, after the 2008 global financial crisis, new instruments and unusual facilities to implement its new innovative monetary policy. The financial world and mostly the social scientists watch as the Federal Open Market Committee (FOMC) decides on a target interest rate in the federal funds market for the next period. The framework that the FOMC uses to implement monetary policy has changed over the last twelve years and continues to evolve today. Here, we try to evaluate the new instruments and their “effectiveness”. Before the 2008 financial crisis, policymakers used one set of traditional instruments (tools) to achieve the target rate. However, several policy interventions, introduced soon after the crisis, drastically altered the landscape of the federal funds market and the traditional economic theory. This new and uncertain environment, with enormous reserves and even interest on reserves, necessitated a new set of instruments by the Fed for its monetary policy implementation. Lately, after seven years of zero interest rate, the FOMC began in December 2015 to increase the target rate and then, went back again to a lower one, but many questions arise. How did they evaluate the effectiveness of these new instruments? Is the current federal funds rate the appropriate one for our economic wellbeing? How efficient was so far this ZIR monetary policy after the latest global financial crisis? Why the Fed put all these burdens of its ‘innovated” new monetary policy to the poor taxpayers (bail out) and to the risk-averse depositors (bail in)? Is it possible for the Fed’s policy to prevent the future financial crises? The federal funds rate was very low and affected negatively the financial markets (bubbles were growing), the real rates of interest (it is negative for twelve years), and the deposit rates (they are closed to zero for twelve years). The redistribution of wealth of depositors and taxpayers continues, which means the true economic welfare is falling and a new global recession was in preparation, if the current unfair easy money policy will persist, ignoring the necessity of a prevention of financial crises. Then, it came as an unexpected plague the coronavirus pandemic, following with a new but, the worse in economic history global crisis (chaos).

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Monetary Policy and the Federal Funds Market.

The Economic Journal ◽

10.2307/2231133 ◽

1973 ◽

Vol 83 (329) ◽

pp. 272

Author(s):

C. A. E. Goodhart ◽

J. M. Boughton

Keyword(s):

Monetary Policy ◽

Federal Funds ◽

Federal Funds Market

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The effects of shifts in monetary policy and reserve accounting regimes on bank reserve management behavior in the federal funds market

Journal of Banking & Finance ◽

10.1016/0378-4266(88)90017-9 ◽

1988 ◽

Vol 12 (4) ◽

pp. 523-535 ◽

Cited By ~ 20

Author(s):

Anthony Saunders ◽

Thomas Urich

Keyword(s):

Monetary Policy ◽

Management Behavior ◽

Federal Funds ◽

Reserve Management ◽

Federal Funds Market ◽

Bank Reserve

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Implementing Monetary Policy after the 2008 Financial Crisis

Archives of Business Research ◽

10.14738/abr.79.7106 ◽

2019 ◽

Vol 7 (9) ◽

pp. 141-172

Author(s):

Ioannis N. Kallianiotis

Keyword(s):

Monetary Policy ◽

Financial Crisis ◽

Interest Rates ◽

Global Financial Crisis ◽

Target Range ◽

Federal Funds ◽

2008 Financial Crisis ◽

Policy Interventions ◽

Federal Funds Market ◽

The 2008 Financial Crisis

Every six weeks or so (9 times during the year), the financial world watches as the Federal Open Market Committee (FOMC) decides on a target interest rate in the federal funds market for the next period. But what happens next? How do policymakers make sure that interest rates in the fed funds market trade within the target range? What will be the effect of the new target rate on the Wall Street and the Main Street? How efficient is so far the monetary policy after the latest global financial crisis? Is the target rate the correct one? The framework that the FOMC uses to implement monetary policy has changed over the last decade and continues to evolve today. Before the 2008 financial crisis, policymakers used one set of instruments to achieve the target rate. However, several policy interventions introduced soon after the crisis drastically altered the landscape of the federal funds market. This new and uncertain environment, with enormous reserves, necessitated a new set of instruments for monetary policy implementation. Lately, after December 2015, as the FOMC began to unwind the effects of these policy interventions, some questions arise: What rules will be followed by the Fed? What happens next as the federal funds market converges to a “new normal”? How effective will be the new policy? Can the Fed prevent a new crisis? The federal funds rate is very low and affects negatively the financial markets (bubbles are growing), the real rates of interest, and the deposit rates, which means the true economic welfare is falling and a new global recession is in preparation, if the latest easy money policy will continue.

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