Abstract
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.
Highlights
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 period
As the performance of financial markets has improved, the Federal Reserve has wound down some of the programs. They were the followings: Money Market Investor Funding Facility ABCP MMMF Liquidity Facility Commercial Paper Funding Facility Primary Dealer Credit Facility Term Securities Lending Facility Term Auction Facility Term Asset-Backed Securities Loan Facility Maturity Extension Program and Reinvestment Policy See, “Expired Policy Tools”, https://www.federalreserve.gov/monetarypolicy/expiredtools.htm 26 This new target was introduced on Wednesday, July 31, 20019 and it was a reduction by 0.25% from the previous rate, which was between of 2.25%-2.50%
FED’S POLICY DEDUCTIONS In response to the financial crisis, the Federal Reserve 68 experimented with new tools and introduced new facilities, new programs and policies to stabilize markets, restore liquidity, and spur economic activity in a conflicting heterogeneous69 and forcefully interdependence world, which is very difficult and makes the monetary policy questionable
Summary
Total assets were on September 10, 2008: $925.725 billion; December 31, 2008: $2,239.457 billion; May 19, 2010: $2,350.890 billion; February 1, 2012: $2,924.947 billion; January 14, 2015: $4,516.077 billion; and on June 13, 2019: $3,849.955 billion. Banks hold reserves in an account at the Fed and are required to maintain a balance above a certain fraction of their deposits, called required reserves (RR).. Recession in January 2008 (Graph 2), a defining feature of the fed funds market was that reserves were scarce. Some other banks would find themselves holding excess reserves at the end of the day (RE ). Since the Fed did not pay interest on excess reserves deposited overnight, these banks would look to lend in the federal funds market to earn a positive rate of return. Entz, and LeSueur (2013) estimated an average daily trading volume of approximately $200 billion in the fourth quarter of 2006, of which approximately 60% was accounted for by bank-to-bank lending. Entz, and LeSueur (2013) estimated an average daily trading volume of approximately $200 billion in the fourth quarter of 2006, of which approximately 60% was accounted for by bank-to-bank lending. (Graph 3).
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
