The Pre-Crisis Monetary Policy Implementation Framework

37 Pages Posted: 22 Mar 2017 Last revised: 21 Jun 2018

See all articles by Alexander Kroeger

Alexander Kroeger

Analysis Group, Inc.

John McGowan

Federal Reserve Banks - Federal Reserve Bank of New York

Asani Sarkar

Federal Reserve Bank of New York

Date Written: May 1, 2018

Abstract

This article describes the Federal Reserve’s monetary policy operating framework prior to the expansion of the Fed’s balance sheet during the financial crisis. To implement the Fed’s mandate of promoting price stability consistent with full employment, the Federal Open Market Committee (FOMC) sets a target for the overnight rate in the federal funds market, where banks trade reserve balances. In the pre-crisis framework, aggregate reserves were scarce such that relatively small changes in the level of reserves would affect rates in the fed funds market. The New York Fed’s open market trading desk (“the Desk”) forecasted demand for and supply of reserves on a daily basis, and then conducted repo operations with primary dealers to supply enough reserves to maintain the equilibrium rate close to its target. The Desk was successful in achieving this objective; the fed funds rate generally remained close to its target, and any deviations were quickly corrected. However, the pre-crisis operating procedures deployed were more complex and opaque than alternative operating frameworks, required substantial intraday overdrafts from the Fed to meet banks’ short-term payment needs, and had to be abandoned once the Fed’s balance sheet expanded in response to the financial crisis. Since the crisis, the Desk has successfully controlled the policy rate using a new framework, suggesting that effective monetary control may be achieved through a different framework.

Keywords: Fed, monetary policy framework, pre-crisis

JEL Classification: E52, E58, N10

Suggested Citation

Kroeger, Alexander and McGowan, John and Sarkar, Asani, The Pre-Crisis Monetary Policy Implementation Framework (May 1, 2018). FRB of NY Staff Report No. 809, Available at SSRN: https://ssrn.com/abstract=2938352

Alexander Kroeger

Analysis Group, Inc. ( email )

111 Huntington Avenue
10th floor
Boston, MA 02199
United States

John McGowan (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Asani Sarkar

Federal Reserve Bank of New York ( email )

Research Department
33 Liberty Street
New York, NY 10045
United States
212-720-8943 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/sarkar/pub.html

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