New approach of the Fed to the implementation of monetary policy

Abstract

The focus of the article — current framework of implementation of monetary policy by the Federal Reserve System (the Fed), which is substantially different from the framework used before the crisis of 2007–2009. The contemporary regime was evolving gradually and for some time the Fed discussed two possible alternatives — return to the previously used regime or remain in the framework, formed after the crisis of 2007–2009. It took about 10 years for the Fed to decide: to conduct monetary policy in the "ample reserves" regime in which control over the short-term rates is exercised through the setting of administered rates, avoiding the need to actively manage the supply of reserves. In the article we discuss the similarities and differences between regimes with limited and ample-reserves, and the effectiveness of new regime during the pandemic crisis. Since the selected monetary policy implementation framework does not rely on precise adjustments of the supply of reserves to control short-term interest rates, the shift to operating at historically maximum reserve levels resulting from large-scale asset purchases during 2020–2021 was smooth, and the effective federal funds rate and other rates remained relatively stable in this period. We also consider the peculiarities of the use of standard and unconventional monetary policy tools during the COVID-19 pandemic, the reasons for introducing in 2021 the new tools and facilities of the Fed, and possible path of monetary policy in the conditions of growing infl ation and the removal of the current level of accommodation in 2022.