Federal Reserve Policy Research Articles

MONETARY POLICY OF WORLD BANKS DURING THE PANDEMIC

MONETARY POLICY OF WORLD BANKS DURING THE PANDEMIC

The Impact of Federal Reserve’s Interest Rate Policy on US Semiconductor Industry

The Federal Reserve raised interest rates by 75BP in June. In the meantime, the American government has enacted laws and orders to promote the growth of the semiconductor sector [4]. The purpose of this essay is to assess how the Federal Reserve's interest rate policy has affected the US semiconductor industry. To determine whether it has a beneficial or negative impact on the industry, this research uses the VAR model. This study projects the yield and volatility of semiconductors using the ARMA-GARCH model. The findings demonstrate that raising interest rates encourages greater investment in the stock market, which is advantageous for the semiconductor sector. But as time passes, the yield's volatility rises as well. This paper provides the reason that since the US chip sector has long had a dominant position, chip demand is not price elastic, and the strengthening of the currency is insufficient to reduce chip demand. The outcome is dominated by net capital inflows.

New Energy Enterprises in the Post-epidemic Era of Investment Considerations

Based on the thinking that the Federal Reserve interest rate hike is coming to an end and the risk-free interest rate of the US dollar is getting higher and higher, the investment opportunities of US stocks in the post-epidemic era are in the new energy field. Coal and natural gas have been the top spot for the U. S. energy market for more than 20 years. Now, the energy battlefield is shifting, and in the next decade, renewable energy, especially solar and wind energy, will dominate in the future. In 2022, the capital market ushered in the Federal Reserve's tight monetary policy, and the market value of new energy stocks plunged. However, some scholars believe that if there is no large-scale war in the next decade, the general direction of the capital market investment is new energy, such as the photovoltaic industry, wind power industry and so on. This paper calculates the statistics of 20 listed 20 new energy companies from 2015 to 2021, and analyzes the multiple financial ratios of each company, compare good companies and general performance of the financial ratio of variance and average, using Mahalanobis Distance analysis of investors choose which financial ratio about the choice of good future investment value about the company is of great significance.

Analysis of the Fed's Implementation Plan to Tackle the Financial Crisis in 2008

After the financial crisis, quantitative easing policy played an important role as the main body of the Federal Reserve's unconventional monetary policy. From the market environment at that time, the emergence of quantitative easing policy will play a positive role through the interest rate commitment effect. In times of crisis, it is feasible for the Fed to use some extent, and can be used as a reference to save the crisis in the future. The central bank should play an effective and active role in maintaining financial stability. In times of crisis, central banks should focus on providing liquidity, and even act as an important intermediary to the financial system, just as the Fed has done in this crisis. The crisis shows that, in the case of market failure, the central bank can effectively prevent the bank failure, and clean up the panic and spread caused by the collective irrational behavior. In the systemic financial crisis period, the central bank will actively innovate the rescue plan from the Fed's crisis rescue, open discount Windows to non-bank financial institutions, expand the scope of acceptable collateral, and access the financial markets to buy and sell private sector securities to maintain the financial system. Through a series of measures and corresponding results of the Federal Reserve to deal with the crisis, this paper provides a reference for the international countries facing similar problems and forms a complete evaluation system to establish the appropriate crisis management model for the international financial framework.

A Personal View of Five Decades of Recessions

Since 1970 the U.S. has experienced 7 recessions of various length, severity, and regional impact. This paper explores these 7 recessions and describes the causes, severity, length and regional impacts for each recession. The key takeaways from this study is that exogenous energy shocks and oil prices matter as they contributed to four of the six recessions. In addition, Federal Reserve policy matters as in three of the six recessions, the Federal Reserve either directly cause or contributed to the decline. On a regional level, the severity and duration of recession is determined by where you live. The Plains region was consistently the least impacted by downturns in the economy. The Rocky Mountain region was next in also being less cyclically sensitive to economic downturns.

UNCERTAINTY AND MONETARY POLICY DURING THE GREAT RECESSION

AbstractWe employ a nonlinear proxy‐VAR approach to document the large response of real activity to a financial uncertainty shock during and in the aftermath of the Great Recession. We replicate this evidence with an estimated DSGE framework that we employ to quantify the output loss due to the large uncertainty shock that materialized in 2008Q4. We find such a shock to be able to explain about 60% of the output loss in the 2008–2014 period. Our model also points to the powerful role played by the Federal Reserve's systematic monetary policy in limiting the loss of output during the Great Recession.

U.S. Federal Reserve Policies can cause Political instability by raising bread prices.

This note argues that the monetary policies of the U.S. Federal Reserve impact food prices globally and can – by extension – affect the incidence of food riots and broader social conflict. We additionally claim that these impacts are especially likely in the case of commodities with more price-inelastic demand, staple cereals in particular, but less likely in the case of food commodities with more price-elastic demand, such as meats and oil. Using mediation analysis, we find empirical support for the impact of changes to US dollar supply on food riots from 2000–2011. We also find that this relationship extends to broader measures of social conflict (including protests, riots, strikes, etc.). We conclude with a cautionary note about how to interpret these results.Supplementary InformationThe online version contains supplementary material available at 10.1007/s12571-022-01300-0.

Monetary policy reaction function and the financial cycle

We examine whether the systematic response of monetary policy to financial imbalances matters for financial stability. We measure how responsive the Federal Reserve's policy is to imbalances in the equity, housing and credit markets. We find that changes in these policy sensitivities predict the subsequent development of financial imbalances. When monetary policy responds more counter-cyclically to market overheating, imbalances tend to decline over time. This effect is distinct from that of current and anticipated interest rate levels – the risk-taking channel. The evidence highlights the importance of the systematic component of monetary policy reaction function in shaping the financial cycle.

A note on the Bitcoin and Fed Funds rate.

This study examines the potential influence of the Federal Reserve policy on Bitcoin price dynamics. The empirical investigation is based on methodologies to quantify the influence of the Fed Funds rate on Bitcoin through linear, nonlinear, and spillover effects. It covers a set of six representative assets, including Bitcoin, Fed Funds rate, S&P 500, 10-year US Treasury Bond, USD/EUR, and Gold from January 2015 to February 2021. Evidence is provided that Fed Funds rates have nonlinear effects and temporarily strong spillover effects on Bitcoins.

The Effects of Federal Reserve's Quantitative Easing and Balance Sheet Normalization Policies on Long-Term Interest Rates

The Effects of Federal Reserve's Quantitative Easing and Balance Sheet Normalization Policies on Long-Term Interest Rates

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.

The COVID-19 Crisis and the Federal Reserve's Policy Response

<ns2:p>The COVID-19 pandemic and the mitigation efforts put in place to contain it delivered the most severe blow to the U.S. economy since the Great Depression. In this paper, we argue that the Federal Reserve acted decisively and with dispatch to deploy all the tools in its conventional kit and to design, develop, and launch within weeks a series of innovative facilities to support the flow of credit to households and businesses. These measures, taken together, provided crucial support to the economy in 2020 and are continuing to contribute to what is expected to be a robust economic recovery in 2021.</ns2:p>

The Federal Reserve's response to the COVID-19 contraction: An initial appraisal.

We provide an initial assessment of the Federal Reserve's policy response to the COVID‐19 contraction. We briefly review the historical episode and consider the standard textbook treatment of a pandemic on the macroeconomy. We summarize and then evaluate the Fed's monetary and emergency lending policies through the end of 2020. We credit the Fed with promoting monetary stability while maintaining that it could have done more. We argue that the Fed could have achieved stability without employing its emergency lending facilities. Although some facilities likely helped to promote general liquidity, others were primarily intended to allocate credit, which blurs the line between monetary and fiscal policy. These credit allocation facilities were unwarranted and unwise.

Dynamic impact of the U.S. monetary policy on oil market returns and volatility

In this paper, we assess the dynamic impact of the U.S. monetary policy announcements on oil market futures returns and volatility. We use intra-day data for West Texas Intermediate (WTI) oil futures together with a time-varying modeling approach to study the nature of this dynamic impact. In addition, we also control for macroeconomic news shocks and separately study the response of good and bad realized volatility. Evidence suggests that there is a significant time variation in the response of oil returns, as well as its volatility to the Federal Reserve policy announcements. Broadly, we also find that higher (lower) uncertainty about Federal Reserve policy actions is associated with a weaker (stronger) impact of the surprise policy announcements on oil returns and volatility.

The impacts of interest rate changes on US Midwest farmland values

PurposeThis paper quantifies the effects of recent Federal Reserve interest rate changes, specifically recent hikes and cuts in the federal funds rate since 2015, on Midwest farmland values.Design/methodology/approachThe authors apply three autoregressive distributed lag (ARDL) models to a panel data of state-level farmland values from 1963 to 2018 to estimate the dynamic effects of interest rate changes on the US farmland market. We focus on the I-states, Lakes states and Great Plains states. The models in the study capture both short-term and long-term impacts of policy changes on land values.FindingsThe authors find that changes in the federal funds rate have long-lasting impacts on farmland values, as it takes at least a decade for the full effects of an interest rate change to be capitalized in farmland values. The results show that the three recent federal funds rate cuts in 2019 were not sufficient to offset the downward pressures from the 2015–2018 interest rate hikes, but the 2020 cut is. The combined effect of the Federal Reserve's recent interest rate moves on farmland values will be positive for some time starting in 2022.Originality/valueThis paper provides the first empirical quantification of the immediate and long-run impacts of recent Federal Reserve interest rate moves on farmland values. The authors demonstrate the long-lasting repercussions of Federal Reserve's policy choices in the farmland market.

The SOFR and the Fed's Influence Over Market Interest Rates

The secured overnight financing rate (SOFR) is the successor to LIBOR (London interbank offered rate) as a benchmark rate for lending in US dollars. Our results show that the SOFR aligns with the Federal Reserve's policy target more closely than LIBOR. In addition, short-term market rates are more responsive to the SOFR than to LIBOR. Our findings highlight the advantages of the new benchmark rate over its predecessor.

Investment, Profits and Federal Reserve's Ultra-Low Interest Rate Policy

In recent decades, investment has been lackluster despite high returns on capital, high valuations measured by Tobin’s Q, and low interest rates. In this paper, we provide an account of weak investment after the Great Recession by explaining why investment has grown decreasingly responsive to interest rates, and by focusing on the role of profits in determining investment. This proposal overcomes some limitations of secular stagnation theories and contributes to accounting for monetary policies’ limited effectiveness in boosting the investment component of aggregate demand. Given stock price distortions, measures of profitability and profits less reliant on stock market valuations should be used to explain investment dynamics in the recent macroeconomic environment.

An overview of the Fed's new credit policy tools and their cushioning effect on the COVID-19 recession

The economics literature lacks articles that provide a broad roadmap—let alone a logical explanation—of the new set of Federal Reserve policy tools that were created to counter the COVID-19 recession. This study provides an overview of the motivation for these new credit-easing programs—namely to damp feedback mechanisms and channels that would otherwise amplify the downturn and impede a subsequent recovery. The study then briefly assesses the impact of the new policy tools and addresses the risks they might pose. In addition, the new credit easing tools are put into historical context through a discussion of their development as part of the Fed's evolving and expanding role in countering financial crises.

Macroeconomic Effects of Federal Reserve's Unconventional Monetary Policy: A Computational Linguistics Approach

I propose a new approach to estimating the Federal Reserve’s unconventional monetary policy after the Great Recession. During the 2009-2015 U.S. zero lower bound period, the Federal Reserve resorted to unconventional policies like forward guidance and large-scale asset purchases. I quantify these policies by creating an unconventional monetary policy index using computational linguistics and machine learning on the FOMC meeting minutes. This index provides information on how much of the discussion during each meeting was pertaining to the large-scale asset purchase program and forward guidance. A positive shock to this measure can be interpreted as more discussion about this topic in particular meeting. Using such shocks as instruments in a in a factor-augmented vector auto-regression framework, I find that the Fed’s unconventional policy had its desired effects of stimulating the economy, by increasing output and reducing the unemployment rate. I also find significant, albeit less, effects on the financial markets.

Crisis and Credit Allocation: The Effect of Ideology on Monetary Policy during the Great Depression and the Great Recession

Both during the Great Depression and the Great Recession, monetary policy deviated from its normal course whereby the central bank would aim to provide credit to solvent institutions while allowing insolvent institutions to fail. In both cases, monetary policy was shaped by ideology that eschewed inflationary policy as remedy for economic contraction. During the Great Depression, the Federal Reserve Board of Governors, led by Adolph Miller engaged in a policy of direct pressure that denied credit to banks that had supported speculative investment. This was part of a more general program of monetary tightening implemented by the Board in the early years of the Great Depression. During the Great Recession, Federal Reserve Chairman Ben Bernanke engaged in a program of credit allocation, using deposit accounts at the Federal Reserve to sterilize the inflationary effects of expansion, a policy practically inscrutable to the public. Both policies were the result of beliefs that a general provision of liquidity is not an appropriate or efficacious means to correct an economic downturn. Both Miller and Bernanke left their mark on Federal Reserve policy by increasing the level of support provided by the Federal Reserve to the U.S. Treasury.