Uncertainty regarding the effectiveness of Federal Reserve monetary policies over time in the U.S.: an exploratory empirical assessment

Abstract

In the present study, we empirically investigate the uncertainty of the effectiveness of recent monetary policies in lowering the real mortgage rate in the U.S. In particular, we have an eye towards determining whether the Fed's policies have been consistently effective or whether, instead, there is uncertainty regarding whether, when, and to what extent these policies achieve their ostensible goal of lowing the mortgage rate. Based upon empirical estimates of a loanable funds model, it is shown that the consistency of recent monetary policies, as reflected in the ratios of the M2 money supply to GDP and quantitative easing to GDP, has varied considerably between the study periods 1974–2009, 1974–2010, 1974–2011, 1974–2012, 1974–2013, 1974–2014, and 1974–2015, implying that there exists uncertainty regarding how consistent monetary policy effectiveness really is. This monetary policy uncertainty is even more apparent when the periods 1974–2008 and 1974–2016 are considered. Moreover, it is observed that elevated interest rate risk is a collateral effect of recent monetary policies. Interest rate risk seriously endangers the health of the macro-economy and throws future monetary policy effectiveness even further into question and yields further economic uncertainty.