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• W1566807780 abstract "The Federal Reserve aggressively eased monetary policy during the 2008-09 global financial crisis. The Federal Open Market Committee (FOMC) cut the federal funds rate target to near zero, and the Board of Governors introduced a number of novel liquidity facilities. In addition, the FOMC purchased long-term Treasuries and agency mortgage-backed securities on a large scale. These actions caused the Fed's balance sheet to balloon.As the balance sheet grew to unprecedented size, the Open Market Desk at the New York Fed found it increasingly difficult to achieve the FOMC's target funds rate. In response, in October 2008, as authorized under the Financial Services Regulatory Act of 2006 and the Emergency Economic Stabilization Act of 2008, the Federal Reserve began paying interest on excess reserves. This interest rate was expected to establish a floor under the federal funds rate. The discount rate-which since January 2003 has been set as a penalty rate above the funds rate target-was expected to limit upward pressure on the funds rate.With these moves, the Federal Reserve's operating framework now incorporates the essential elements of a or system. In such a system, the target for the federal funds rate would typically be set within the corridor established by the discount rate at the ceiling and the interest rate on excess reserves at the floor. Although the Federal Reserve has not formally adopted a channel system, establishing a floor under the federal funds rate target will be especially important as the Federal Reserve begins to exit its highly accommodative policy stance.While a corridor framework may offer a number of advantages as an operating system, it may also create new challenges. The key advantages are that it could help the Federal Reserve achieve its target for the federal funds rate while allowing the balance sheet to act as an independent tool of policy. A key question is whether the discount rate will be an effective ceiling and the interest rate on excess reserves an effective floor. In addition, how changes in the funds rate target, the discount rate, and the rate on excess reserves will be sequenced is unclear. In particular, the roles of the FOMC, Board of Governors, and Reserve Bank Boards of Directors in such a system may need to be clarified.This article examines how a corridor system works in theory and practice. The first section of the article explores how the Federal Reserve has traditionally sought to achieve its target for the federal funds rate and why that no longer works. The second section describes the advantages of a corridor operating system, shows how other central banks have operated such a system, and discusses potential problems in implementing the corridor system in the United States.I. HOW HAS THE FEDERAL RESERVE TRADITIONALLY OPERATED?Understanding the merits and potential pitfalls of a corridor operating system first requires understanding the operating procedure traditionally used by the Federal Reserve to achieve the FOMC's target federal funds rate. Potential operational problems and actual policy concerns with this traditional operating framework have prompted policymakers and economists to consider alternatives.The traditional frameworkThe FOMC sets a target for the federal funds rate consistent with its objectives of maximum employment, stable prices, and moderate long-term interest rates.1 The Federal Reserve's traditional approach to achieving the target federal funds rate differs from the approach required under a corridor system. Traditionally, the FOMC has instructed the Open Market Trading Desk at the New York Federal Reserve to conduct open market operations to achieve the Committee's target funds rate. The Desk carries out its role by estimating the quantity of reserves that will be demanded given the FOMC's target federal funds rate and supplying the reserves required to meet that demand at the target federal funds rate. …" @default.
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• W1566807780 date "2010-09-22" @default.
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• W1566807780 title "Monetary Policy under a Corridor Operating Framework" @default.
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