Federal Reserve Monetary Policy Research Articles

Does monetary policy contribute to housing price booms? Empirical evidence from the US economy

Purpose This study aims to investigate the effect of monetary policy on housing prices for US economy. It specifically examines whether nominal or real interest rates are the key drivers behind fluctuations in housing prices in US. Design/methodology/approach Monthly data from January 1991 to July 2023 and various appropriate analytical tools such as unit root tests, Johansen’s cointegration test, vector error correction model (VECM), impulse response function and Granger causality test were applied for the data analysis. Findings The Johansen cointegration findings reveal the presence of a long-term relationship among the variables. VECM results indicate a negative correlation between nominal and real interest rates and housing prices in both the short and long terms, suggesting that a strict monetary policy can help in controlling the housing price increase in the USA. However, housing prices are more responsive to changes in nominal interest rates than to real interest rates. Additionally, the study reveals that the COVID-19 pandemic contributed to the upsurge in housing prices in the USA. Originality/value This study contributes by examining the role that nominal or real interest rates play in shaping housing prices in the USA. Moreover, given the recent significant upsurge in housing prices, this study presents a unique opportunity to investigate whether these price increases are influenced by the Federal Reserve's monetary policy decisions regarding nominal or real interest rates. Additionally, using monthly data, this study provides a deeper understanding of the fluctuations in housing prices and their connection to monetary policy tools.

Toward green central banking: Proposing an augmented Taylor rule

This study explores the greening of the Federal Reserve monetary policy from January 2000 to August 2023. We discuss the challenges inherent in the US central bank's pursuit of an alternative monetary policy to deal with its main mission of price stability while also taking climate change into account, and propose an augmented green Taylor rule. In particular, we reconsider the Taylor rule model while allowing the Fed to conduct its monetary policy, taking both physical and transition risks into account. To our knowledge, this is the first study on the sensitivity of monetary instruments and monetary policy with respect to physical and transition risks. Our analysis yields two interesting findings. First, Fed's greening of US monetary policy appears feasible, as taking the climate risk factors into account in formulating the policy is not out of step with the main price stability mandate and could yield a climate risk premium. Accordingly, the climate risk measure related to transition and physical risk drives the federal funds rate, and an augmented green Taylor rule would fit the data better than the basic Taylor rule. Second, we find that the Fed's reaction to news related to transition and physical risks in particular and climate risk in general has been more pronounced since the post COVID-19 subperiod than over the period as a whole.

Testing the Dimensionality of Policy Shocks

Abstract This paper provides a nonparametric test for deciding the dimensionality of a policy shock as manifest in the abnormal change in asset returns’ stochastic covariance matrix, following the release of a macroeconomic announcement. We use high-frequency data in local windows before and after the event to estimate the covariance jump matrix and then test its rank. We find a one-factor structure in the covariance jump matrix of the yield curve resulting from the Federal Reserve’s monetary policy shocks before the 2007–2009 financial crisis. The dimensionality of policy shocks increased afterwards because of the use of unconventional monetary policy tools.

Federal Reserve Monetary Policy and Wealth Inequality: An Instrumental-Variable Local Projections Approach

Federal Reserve Monetary Policy and Wealth Inequality: An Instrumental-Variable Local Projections Approach

The Devolution of Federal Reserve Monetary Policy Strategy, 2012-24

The Devolution of Federal Reserve Monetary Policy Strategy, 2012-24

The Subprime Crisis: A Systemic Failure in Financial Markets

This paper delves into an analysis of the 2008 Financial Crisis, exploring its relevance and influence on the current complex global macroeconomic landscape, including the COVID-19 economy and the Russia-Ukraine conflict. Against the backdrop of frequent uncertainty and fluctuations in the global economy, the recent recognition of the 2022 Economic Nobel Prize emphasizes the importance of studying financial crises. The article begins by examining three key factors that contributed to the 2008 Financial Crisis: the Federal Reserve's monetary policy, subprime mortgages, and credit default swaps. It then explores the far-reaching consequences of the crisis, highlighting specific examples to illustrate its impact. Furthermore, the paper explores the changes implemented in response to the crisis, focusing on two dimensions: the Dodd-Frank Act and Basel III. It discusses the implementation and effects of these regulatory measures in the post-crisis era. Lastly, the paper underscores the significance of the 2008 Financial Crisis and its application to contemporary economic challenges amidst a complex external environment. By drawing connections between past and present crises, this research aims to shed light on potential solutions and inform policy decisions in the face of ongoing economic challenges.

Federal Reserve’s Influence Over the Bangladeshi Taka

This paper investigates the relationship between the Bangladeshi Taka (BDT) and the U.S. Federal Reserve's monetary policy, particularly the impact of changes in the U.S. Effective Federal Funds Rate (EFFR) on the Taka's valuation. Despite Bangladesh's steady economic growth from 2003 to 2023, the Taka consistently depreciated against the U.S. Dollar, especially during periods of increased EFFR. The study contrasts the Taka's behaviour with other South Asian currencies, finding that the Taka's depreciation pattern is uniquely correlated with EFFR changes, unlike its regional counterparts. This correlation suggests that external factors, specifically U.S. monetary policy, significantly influence the Taka's value. This insight challenges the local perspective attributing the Taka's depreciation solely to domestic policy failures, emphasing the need for considering global economic influences in the depreciation of the Bangladeshi Taka.

An Assessment of the Spillover Effects of Fed Rate Hikes on Chinese Economy

Facing the pressure of high CPI, the interest rate hike process has initiated by the Federal Reserve (Fed) in the context of the global economic downturn in 2022. This adjustment in the Federal Reserve's monetary policy has a significant influence on the global economy, including China. This article focuses on the spillover effect of the Federal Reserve's interest rate hike policy on Chinese economic development. It will first review the historical background and impact of the four interest rate hikes cycles in the Unite States since 1994. And then the analysis of the impact is presented in three different transmission channels: interest rate channel, exchange rate channel, and capital flow channel. After that the policy suggestions on how to deal with the spillover effect is provided. Lastly, this article concludes that even though the spillover effect of interest hike policy continues to put downward pressure on Chinese economy, it is shrinking with China becoming more independent in implementing its monetary policy.

Subprime Crisis: Causes & Consequences

The 2007-2009 financial crisis, considered the worst crisis in human history since the Great Depression of the 1930s was not expected to end the period of the Great Moderation when financial and economic stability lasted from the mid-1980s to 2007. Although more than a decade has passed since the crisis, the analysis of the causes and consequences of the 2007-2009 financial crisis remains relevant for today's global economy, which is affected by both COVID-19 and the war in Ukraine. The crisis came as a surprise to almost everyone, but its roots were already in the U.S. financial system a decade ago. The explosion of the housing market in the United States at the beginning of the 21st century attracted a large number of banks and financial institutions to invest. The immediate cause of the financial crisis was the Federal Reserve's monetary policy, inflation in subprime mortgages, and the abuse of credit default swaps. The financial crisis also triggered a large number of banks to go bankrupt due to insolvency or default, and after the collapse of Lehman Brothers, the US government had to use a large number of emergency funds to bail out the market. These bailouts largely saved these too-big-to-fail companies and had no significant effect on the years of high unemployment.

On the effectiveness of foreign exchange reserves during the 2021-22 U.S. monetary tightening cycle

This paper examines whether the size of foreign exchange (FX) reserves explains cross-country differences in foreign currency depreciation realized over the 2021-22 Federal Reserve monetary policy tightening that led to a sharp appreciation of the US dollar. Across a broad sample of countries, we document that an additional 10 percentage points of FX reserves/GDP held ex-ante were associated with 1.5 to 2 percent less exchange rate depreciation against the US dollar and this buffer effect was larger among less financially developed economies. Effects were more pronounced for large-reserve countries that sold reserves to intervene than for large-reserve countries that did not intervene, supporting the presence of both balance sheet and intervention channels. Higher ex-ante policy rates were also associated with less depreciation especially among financially open economies. An analysis of daily currency movements following the June 2021 FOMC meeting corroborates the main results. These findings suggest that FX reserves may promote monetary policy independence in the presence of global spillovers.

The Impact of Federal Reserve Monetary Policy on China's Industrial Economy

As the two largest economies in the world, China and the United States have a far-reaching impact on China's economic growth and global economic development. However, generally speaking, the impact of the Federal Reserve's monetary policy on the economic growth of various provinces in mainland China is quite heterogeneous. For example, the impact of the Federal Reserve's monetary policy on the economic growth of eastern coastal and border provinces is less than that of inland provinces. Therefore, China should not only comprehensively use monetary policy and fiscal policy tools to effectively deal with short-term external shocks but also make full use of the favorable factors brought by the Federal Reserve, solidly promote economic restructuring, transformation, and upgrading, accelerate the structural transformation of economic growth momentum, and actively cultivate new kinetic energy for economic development.

The Impact of Fed Monetary Policy on the Chinese Economy

In order to cope with persistently high inflation since the COVID-19 pandemic, the Federal Reserve has adopted a continuous monetary tightening policy, raising the federal benchmark interest rate three times in a row. Meanwhile, as the United States is a big importer, its monetary policy is bound to affect many countries. Therefore, this article will from the interest rate, import, and export, etc., to analyze the influence on China; the final purpose is how to make it clear that the federal reserve's monetary policy impact China to take appropriate measures to avoid some adverse effect, give full play to the government regulation function, before the crisis timely regulation and economical price, can avoid significant economic losses.

Post-FOMC Drift

We study the patterns of stock returns around the Federal Reserve monetary policy announcements. Much of the existing literature interprets changes in short rates around the announcement windows as policy surprises. In contrast, we follow the “Fed information effect” literature, which posits that financial markets react to central bank announcements not just for unexpected changes in monetary policy stances (monetary policy news), but also for central bank’s assessment of economic conditions (non-monetary policy news). We identify the good/bad news using a combination of sign restrictions with high-frequency financial data. “Bad news” events are times when the market interpreted the Fed decisions/announcements as revealing negative Fed information about the economy, and vice versa for “good news” events. A novel finding is that following bad news events, we observe significantly positive stock returns in a 20-day period. This observation is largely consistent with a story of asymmetric effects of good and bad news on the level of uncertainty. Further analysis shows that the post-FOMC drift to economic news in Fed announcements is a market-wide phenomenon. A trading strategy that buys following “bad news” earns an excess return of 2.5% per year with a Sharpe ratio of 0.43.

The Federal Reserve's Interest Rate Policy and Its Impact Against a Background of Inflation and High Unemployment Rate

This research adopts various economic data sources to investigate the effects of Federal Reserve (Fed) policies on the US economy. Specifically, the study focuses on labor market flows, short and long-term inflation expectations, and interest rates from 1960 to 2023. The findings suggest that over the past three decades, the Fed has artificially manipulated interest rates to curb long-term increases in unemployment. In this regard, this paper discusses the Impact of Business Financing and Costs, Labor Costs and Prices, Impact on Market Supply and Demand on interest rate changes from three perspectives. This study delves into detailed micro data on job vacancy rates and average earnings coefficients for different workers. By analyzing these factors and interest rate data, the paper argues that there is a strong correlation between employment trends and the Federal Reserve's monetary policy. Based on the data, the study projected that even if long-term inflation expectations remained stable, underlying inflation would still be half a percentage point above its long-term trend by the end of 2023. Overall, the paper provides valuable insight into the complex relationship between Fed policy, employment trends, and inflation in the U.S. economy.

The Global Credit Crisis of 2008: Causes and Responses

Since the COVID-19 pandemic began in 2018, the world has been suffering. Most obviously, the coronavirus killed millions of people and severely disrupted People's Daily lives. Beyond that, one of the most important effects is the enormous damage to the global economy. Unfortunately, 2021 saw the Russia-Ukraine incident, which seriously hurt the European economy and led to great challenges for the global economy. People grew less confident in the economy and began to hoard gold. In the process of global economic development, there have been many financial crises, the financial crisis in August 2008 is undoubtedly the biggest impact on the global financial market since 1929, and the impact is even worse than that of the Great Depression. The crisis was caused by a housing bubble and misleading economic policies such as the Federal Reserve's monetary policy, subprime mortgages, and CDS. Large financial institutions failed in droves, including Lehman Brothers. The causes and effects of the financial crisis are discussed in this article. The study concludes by discussing the significance of the issue and a variety of measures to stop such occurrences in the future. To ensure steady development of the global economy, especially in light of the ongoing effects of the COVID-19 epidemic and the conflict in Ukraine, this paper must draw lessons from the previous financial crisis and enhance government intervention of the financial system through policy adjustments.

Impact of the Policies Implemented by the United States in Response to the COVID-19

The global and American economies have been completely upended by the coronavirus disease pandemic, which has killed a sizable number of people and forced the closure of vital industries. As a result of the pandemic, there have been more business failures, less private investment, less value chain integration, and a loss of both human and productive capital. Even though there is uncertainty surrounding the outlook for U.S. economic growth, the outbreak has had a significant impact. As a result, the US has released numerous policies in response to COVID-19 to support the country's economic recovery. In addition to research data from some books and websites, this study analyzes data from the Federal Reserve's forecast of the US gross domestic product. The primary focus of this study is on the economic policies implemented by the United States to promote economic recovery following the outbreak of the COVID-19 pandemic. At the same time, research how these policies impact the recovery of the US economy. Research has shown that the COVID-19 pandemic has hampered both the production and consumption capacities of consumers and businesses. The American government has implemented a significant fiscal stimulus in response to the economic unrest. Given the effectiveness of these policies in increasing consumption and the relative supply inelasticity, supply chain bottlenecks and elevated prices may result. However, it should be acknowledged the beneficial impact that the government's generous assistance has had on this historically significant crisis. The US government's CARES Act, which it passed in response to the recent crown epidemic, and the Federal Reserve's monetary policy tools have started to influence the US economy's recovery.

An extended wavelet approach of the money-output link in the United States.

The paper examines the link between money and output in the U.S. by using wavelet analysis. The time span covers the period from 1960Q1 to 2021Q1. The main results evidence that money positively leads real output from the late 1960s to 1982, at medium frequency, with the interest rate playing an important role. In contrast, we reveal that real output negatively leads money, at the same medium frequency, but from the late 1990s to 2021. The COVID-19 pandemic generates significant co-movements in the short and medium frequencies, over the period from 2020 to 2021, with output negatively leading money. We underline that Federal Reserve monetary policy operating procedures play an essential role in explaining these findings. The results support using the federal funds rate operating procedure as countercyclical monetary policy measures and implementing unconventional monetary policy tools in times of the effective lower bound. Finally, no relationship between money and output is observed in the long term, while the short term (i.e. high frequency) reveals rather chaotic co-movements. The results remain robust to alternative wavelet tools, higher-frequency datasets, and a Hodrick–Prescott filtered quarterly sample.Supplementary InformationThe online version contains supplementary material available at 10.1007/s00181-022-02294-6.

High School History Textbooks and the Causes of the Great Depression: Missing the Obvious

Years ago, it became established that the severity and length of the Great Depression were due largely to misguided Federal Reserve monetary policy and the resulting catastrophic bank failures. This result is confirmed by surveys of scholars in the area and books specifically written on economic history. Yet the leading textbooks used in high school US history fail to reflect these findings. The texts (1) tend to ignore the recognized causes of the Great Depression’s severity and (2) overstate the role of other causes rejected by the majority of economic historians. After laying out this curious disjuncture, this article presents curricular resources to help high school teachers more accurately present the Great Depression’s causes.

Federal Reserve's Monetary Policy and Its Impact on China's Economic Development

The global financial crisis in 2008 caused great trauma to the economy and financial markets all over the world. Following the onset of the financial crisis, the monetary authorities of various nations implemented a range of monetary policies to deal with the crisis's negative impact on the real economy. The United States, as the world's largest country, the implementation of the Fed's monetary policy has a significant impact not only on its own macro-economy, but also on the world macro-economy. Following the onset of the financial crisis in 2008, the Federal Reserve implemented a series of monetary policy operations, including lowering the federal fund interest rate and the money market re-discount interest rate, to address the financial crisis' impact on the domestic economy of the United States. Unconventional monetary policy mainly includes reducing the federal funds rate to the zero range boundary. Based on previous studies, this paper finds that the monetary policies of the Federal Reserve mainly affect other countries' economies through four channels: asset price, exchange rate, interest rate and credit. At the same time, in view of the negative spillover effects brought by the Federal Reserve, China should adopt proactive financial policies to resist risks.

The Spillover Effects of US Unconventional Monetary Policy on the Taiwanese Economy

Due to the severity of the 2007-2009 financial crisis, the United States Federal Reserve aggressively lowered the policy rate to zero and adopted several “unconventional” monetary policies, including “Quantitative Easing (QE).” The literature has long suggested that US monetary policies had strong spillover effects on foreign countries. Accordingly, the governor of Taiwan's central bank, Dr. Fai-Nan Perng, expressed strong concerns about such ripple effects of US policy on the Taiwanese economy. This paper follows Ammer et al. (2016) to use the Federal Reserve's unconventional monetary policy announcements to support the claim that US monetary policy has significant impacts on the Taiwanese economy and financial markets. Also, the spillover effects of pre-crisis “traditional” monetary policies are compared with the spillover effects from implementing “unconventional” policies during and post-crisis. The results show that US monetary policies exert significant impacts on the Taiwanese economy. Finally, we discuss the response of Taiwan's central bank to these spillover effects.