Federal Reserve Monetary Policy Research Articles

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.

Monetary Policy and Herding Behavior: Empirical Evidence From Indonesia Stock Market

This study aims to analyze the role of monetary policy, including the spillover of the US Federal Reserve (Fed) monetary policy, in the existence of herding behavior in the Indonesian stock market. We used beta herding to measure the level of herding behavior and analyze the relationship between monetary policy and beta herding using the VECM model, as well as IRF and FEVD. This study shows that monetary policy plays a role in the existence of herding behavior in the Indonesian stock market. Although the effect of monetary policy on herding behavior is relatively small, Fed monetary policy shocks have a greater effect on the existence of herding behavior in the Indonesian stock market. The credibility of Bank Indonesia (BI) and the Fed may play a role in shaping investors’ expectations. Therefore, policymakers have to take into account the volatility of asset prices in formulating monetary policy

Monetary Policy Spillovers through Invoicing Currencies

ABSTRACTThis paper explores the role of trade invoicing currencies in the international spillover of monetary policy. Using high‐frequency measures of Federal Reserve monetary policy shocks, I show that exchange rates, interest rates, and equity returns in countries with a larger share of dollar‐invoiced imports systematically respond more to U.S. monetary policy. I document similar transmission effects from European Central Bank (ECB) monetary policy shocks to countries with euro‐invoiced imports. I rationalize these findings within a New Keynesian framework. As a result of these spillovers, domestic monetary policy should be less effective in countries with traded goods invoiced in foreign currencies.

Resilience of Islamic cryptocurrency markets to Covid-19 shocks and the Federal Reserve policy

PurposeAfter the COVID-19 outbreak, the Federal Reserve has undertaken several monetary policies to alleviate the pandemic consequences on the stock markets leading to a misunderstanding on the cryptocurrency market response. This paper aims to evaluate the effects of the Federal Reserve monetary policy on the Islamic and conventional cryptocurrency dynamics during the COVID-19 pandemic. We, specifically, examine the associate bubbles and feedbacks effects.Design/methodology/approachThis paper developed a novel methodology that detects market bubbles using the statistical indicators defined by Psychological (PSY) tests. It also investigated the effect of the Federal Open Market Committee (FOMC) announcements on conventional and Islamic cryptocurrencies compatible with Islamic laws “Shari’ah” by using the event-driven regression.FindingsThe empirical results show that the FOMC announcements have a positive significant effect after one day of the event and a negative effect before two days of the announcement on the conventional cryptocurrency markets. However, the reaction of Islamic cryptocurrencies to these events is not significant except for Hello Gold after one day of the announcement. Besides, the Hello Gold and X8X cryptocurrencies present no bubbles during this period. However, Bitcoin and Ethereum markets have short-lived bubbles.Research limitations/implicationsThe main contribution of this study is the investigation of the response and vulnerability to pandemic shocks of a new category of cryptocurrencies backed by tangible assets. This work has practical implications as it provides new insights into trading opportunities and market reactions.Originality/valueTo our knowledge, this work is the first study that compares the response of Islamic and conventional cryptocurrency markets to FOMC announcements during the COVID-19 pandemic and examines the presence of bubbles in these markets. Besides, the originality of this work is derived from the novelty of the data employed and the method used (PSY tests) in this study.

Corporate bond market reactions to quantitative easing during the COVID-19 pandemic.

Using transaction data from the first half of 2020, we examine the reaction of corporate credit spreads to the Federal Reserve’s monetary policy announcements. We find evidence that the bond markets are segmented across credit ratings, which led to different initial reactions across bonds with different credit ratings but spread across various sectors of corporate bonds over the longer event window. To quantify the default risk channel of quantitative easing, we apply the variance decomposition approach to credit spreads and find that a significant fraction of credit spread changes indeed correspond to reduced default risk caused by the corporate bond purchase program. In contrast, we only find mixed evidence for the liquidity channel driving the market reaction.

Cryptocurrency bubble risk and the FOMC announcements during COVID-19 black swan event

Purpose After the COVID-19 outbreak, the Federal Reserve has undertaken several monetary policies to alleviate the pandemic consequences on the markets. This paper aims to evaluate the effects of the Federal Reserve monetary policy on the cryptocurrency dynamics during the COVID19 pandemic. Design/methodology/approach We examine the response and feedback effects via an event study methodology. For this purpose, abnormal returns (AR) and cumulative abnormal returns (CARs) around the first FOMC (Federal Open Market Committee) announcement related to the COVID-19 pandemic for the top five cryptocurrencies are explored. We, further investigate the effect of the eight FOMC statement announcements during the COVID19 pandemic on these cryptocurrencies (Bitcoin, Ethereum, Tether, Litecoin, and Ripple). In the above-mentioned crypto-currency markets, we investigate the presence of bubbles by using the PSY test. We then examine the concordance of the dates of these bubbles with the dates of the FOMC announcements. Findings The empirical results show that the first FOMC event has a negative significant effect after 4 days of the announcement date for all studied cryptocurrencies except Tether. The results also indicate that cumulative abnormal returns are significant during the event windows of (−3,8), (−3,9), and (−3,10). Besides, we find that Bitcoin, Ethereum and, Litecoin lived short bubbles lasting for a few days. However, Ripple and Tether markets present no bubbles and no explosive periods. Research limitations/implications This paper presents trained proof that FOMC announcements have a positive effect on volatility's predictive capacity. This work therefore promotes the study of the data quality of volatility in future research as well. Practical implications The justified effect of the FOMC announcements on cryptocurrency as a speculative asset has practical implications for investors in building their trading strategies in anticipation of the next FOMC announcement. Therefore, this study implies that the FOMC announcements contain very relevant information for investors in the cryptocurrency market. This research may not only encourage a better understanding of the evolution of the expectations of policymakers, but also facilitate a better understanding of how these expectations are developed. Originality/value The COVID-19 pandemic has disturbed the stability of financial markets, inciting the Fed to take some monetary regulations. To the best of our knowledge, this study is the first one that analyses the response of five major cryptocurrencies to FOMC announcements during COVID 19 pandemic and associates these dates with bubble occurrences.

Priorities of modern U.S. federal reserve monetary policy

Priorities of modern U.S. federal reserve monetary policy

Diverse Policy Committees Can Reach Underrepresented Groups

Increasing the diversity of policy committees has taken center stage worldwide, but whether and why diverse committees are more effective is still unclear. In a randomized control trial that varies the salience of female and minority representation on the Federal Reserve's monetary policy committee, the FOMC, we test whether diversity affects how Fed information influences consumers' subjective beliefs. Women and Black respondents form unemployment expectations more in line with FOMC forecasts and trust the Fed more after this intervention. Women are also more likely to acquire Fed-related information when associated with a female official. White men, who are overrepresented on the FOMC, do not react negatively. Heterogeneous taste for diversity can explain these patterns better than homophily. Our results suggest more diverse policy committees are better able to reach underrepresented groups without inducing negative reactions by others, thereby enhancing the effectiveness of policy communication and public trust in the institution.

The Corporate Bond Market Reaction to the COVID-19 Crisis

Using transaction data from the first half of 2020, we examine the reaction of corporate credit spreads to the Federal Reserve's monetary policy announcements. We find evidence that the bond markets are segmented across credit ratings, which led to different initial reactions across bonds with different credit ratings but spread across various sectors of corporate bonds over the longer event window. To quantify the default risk channel of quantitative easing, we apply the variance decomposition approach to credit spreads and find that a significant fraction of credit spread changes indeed corresponds to reduced default risk caused by the corporate bond purchase program. In contrast, we only find mixed evidence for the liquidity channel driving the market reaction.

Monetary Policy and its Transmission in a Globalised World

This paper estimates and compares the international transmission of European Central Bank (ECB) and Federal Reserve System monetary policy in a unified and methodologically consistent framework. It identifies pure monetary policy shocks by purging them of the bias stemming from contemporaneous central bank information effects. The results suggest that there is a hierarchy in the global spillovers from ECB and Federal Reserve monetary policy: while the spillovers to consumer prices are relatively small in both directions, Federal Reserve monetary policy shocks have a larger impact on euro area financial markets and real activity. Federal Reserve monetary policy also has a significantly larger impact than ECB monetary policy on real and financial variables in the rest of the world. JEL Classification: E44, E52, F3, E58, F42

Monetary Policy Implementation in MBS Markets Through Heterogeneous Dealers

The Federal Reserve's (Fed) monetary policy implementations often involve extremely large trades within a short time frame and exclusively transact with primary dealers at pre-committed time and quantities. We show that dealers exert market power against the Fed, which is remarkably stronger than that against regular customers. In the agency MBS market, we find that (1) dealers accumulate MBS inventory before Fed purchases and several large dealers acquire most inventory; (2) the same dealer charges discriminatorily higher prices to the Fed than to non-Fed buyers when selling from the same inventory; (3) the Fed's large purchase amount relative to dealers' inventory capacity and operational inflexibility account for half of the uncompetitive pricing each; (4) large dealers extract higher rents and sell more quantities to the Fed than small dealers do.

Federalreserve monetary policy model for the XXI century under crisis test

New elements of the Federal reserve monetary policy are discussed in this article. These are new approaches adopted during first two decades of the 21st century as the reaction on big shifts which occurred in the structure of the American financial market, and in the way it works today. The method of operative management of the level of interest rates on the financial market as one if the main tools of Federal Reserve monetary policy is discussed. The reasons are discussed which permit to use negative interest rates as an effective tool of monetary policy to encourage investments in bonds and stocks. The Fed policy is discussed and estimated, destined to help the economy to manage the problems created by the coronavirus pandemic.

Funding conditions and insurance stock returns: Do insurance stocks really benefit from rising interest rate regimes?

AbstractWe examine funding conditions and U.S. insurance company stock returns. Although constrained funding conditions, signaled by restrictive Federal Reserve monetary policy, correspond with increases in the future payouts of fixed‐income securities held by insurance firms and potentially provide value through the liability side of insurer balance sheets, they also decrease the values of securities currently held in insurer portfolios. Prior research finds that restrictive policy has a negative effect on equity returns in general. Our results suggest the negative impacts of constrained funding environments outweigh the potential positives, as insurance company stock returns are significantly lower during periods of constrained funding. This effect varies within a given funding state and also across insurer type. The effect is strongest during the first 3 months of a constrained funding environment and for life and health insurers—insurer types with longer portfolio durations. For property and liability (P&L) insurers, lower stock return performance only exists in the first 3 months of a constrained funding environment. In the subsequent months, P&L insurers actually have higher stock returns during constrained periods, consistent with their typically shorter duration asset portfolios, which are more quickly rolled over into new higher‐yielding securities.

Connecting the dots: Market reactions to forecasts of policy rates and forward guidance provided by the Fed

AbstractThis paper compares market reactions to forecasts of the policy rate path by the Federal Open Market Committee (FOMC) participants with those to forward guidance from the FOMC post‐meeting statements. The forecasts are those by FOMC participants in the quarterly Summary of Economic Projections (SEP; the “dots”). We conduct the analysis during the period when the FOMC's policy rate was at the zero lower bound. We find that market expectations of the time to lift‐off from the zero lower bound are significantly affected in the expected direction by surprises in SEP dots and in forward guidance. We also find a significant impact of macroeconomic news on market participants' expectations of time to lift‐off. These results are consistent with forward guidance about policy rates and SEP forecasts each contributing to the public's understanding of future Federal Reserve monetary policy and with the conditionality of both forms of communication about future policy rates being understood. We also present evidence that market expectations concerning the time to lift‐off are influenced by the maximum time to lift‐off implied by forward guidance, the SEP, and the economic outlook. An appendix provides the FOMC's forward guidance after each meeting from January 2012 to September 2015 and our interpretation of the implied days to lift‐off.

Monetary Policy Spillovers Through Invoicing Currencies

This paper explores the role of trade invoicing currencies in the international spillover of monetary policy. Using high-frequency measures of Federal Reserve monetary policy shocks, I show the exchange rates, interest rates and equity returns in countries with larger shares of dollar-invoiced imports systematically respond more to US monetary policy. I document similar transmission effects from ECB monetary policy shocks to countries with euro-invoiced imports. I rationalize these findings within a New Keynesian framework. As a result of these spillover effects, countries where traded goods are should be less effective at implementing domestic monetary policy.

THE EFFECTS ON COMMODITY PRICES OF EXTRAORDINARY MONETARY POLICY

AbstractThis article examines the relationship between Federal Reserve monetary policy and other macroeconomic indicators to both a broad commodity price index and an agricultural commodity price index by employing a vector error correction model. Excessive liquidity and the recent long period of ultralow interest rates appear to have played a statistically significant role in affecting prices in the commodities markets. The responses of commodity prices to monetary policy that we estimate generally conform to earlier findings, but the sensitivity of the responses appears different in the face of the unprecedented scope of recent Fed activism.

An augmented Taylor rule for the Federal Reserve's response to asset prices

This paper investigates whether and how the US Federal Reserve has reacted to asset price developments over the period 1979-2011. We examine both the opportunities and limitations of incorporating two asset prices, equity and real estate, into a standard forward-looking and inertial interest rate rule, based on ex-post realised monthly data and taking into account the inherent endogeneity. While the role of house prices is found to be ambiguous due to weak identification, stock prices do represent an important aspect of the Federal Reserve's monetary policy design. Our findings suggest that monetary policymakers did not target stock prices systematically, but rather reacted on few occasions during the full sample period, when misalignments in stock prices were relatively large.