1. The Federal Reserve II. Fed Policy: tools & critique
ECO 473 – Money & Banking – Dr. D. Foster

2. Monetary Policy: Goals & Targets
Open Market Operations
Discount Window
Required Reserve Ratio (rrD)
Price stability
Low unemployment
Sustainable growth
Interest Rates
Monetary Aggregates

3. Targeting the Federal Funds Rate of Interest
Sept. 2017
1.15%

4. Time Lags in Monetary (& Fiscal) Policy
Is Policy the Right Choice?
Time Lags in Monetary (& Fiscal) Policy
Policy time lags
Recognition lag
Response lag
Transmission lag
Real GDP
Business cycle
time

5. Monetary Policy may be counterproductive
Is Policy the Right Choice?
Monetary Policy may be counterproductive
% Real GDP
time
Ideally, policy would dampen the business cycle…
But, dampening the business cycle may lower ave. growth!
Or, if policy kicks in at the wrong time, it could worsen recessions and exacerbate inflationary periods.

6. Discretion versus Rules (Milton Friedman)
Discretionary policy is the source of instability.
A policy rule can eliminate that instability.
To be successful, the commitment must be credible.
Making Monetary Policy Rules Credible
Place constitutional limits on monetary policy.
Achieve credibility by establishing a reputation.
Maintain central bank independence.
Appoint a “conservative” central banker.

7. Has the Fed maintained the value of the $?4%

8. Making Monetary Policy Transparent
FOMC Press Release
Sept. 20, 2017
Q&A
June 22, 2016
Presser
Sept. 20, 2017

9. Quantitative Easing = Credible?
QE 1
QE 2
QE 3

10. Can the Fed undo the QEs? Inflation is a monetary phenomenon.
If economic growth is strong, will banks hold excess reserves?
If banks greatly increase lending, what will happen to inflation?
Can the Fed stop this by paying banks not to lend excess reserves?
Once inflation starts, how fast will inflationary expectations change?
What will happen if the Fed massively sells off MBS & UST?
Survey: In the next five years, we will see:
a. continued economic growth.
b. rising and worsening inflation.
c. recession.
d. stagflation – recession coupled with inflation.

11. The Federal Reserve II. Fed Policy: tools & critique
ECO 473 – Money & Banking – Dr. D. Foster