Closing the Monetary Policy Curriculum Gap: A Primer for Educators Making the Transition to Teaching the Fed's Ample-Reserves Framework

Abstract

The Federal Reserve (the Fed), the central bank of the United States, has a Congressional mandate to promote maximum employment and price stability. While those goals were articulated in 1977, the approach and tools used to implement those objectives have changed over time.

How to Conduct Monetary Policies. The ECB in the Past, Present and Future

“…Only the lower limit of the deposit rate is in effect, working as a point of attraction. The money market rate becomes much less volatile without the active intervention of the central bank (see Ihrig and Wolla (2020)).…”

The Federal Reserve’s Response to the Global Financial Crisis and Its Long-Term Impact: An Interrupted Time-Series Natural Experimental Analysis

“…Therefore, the Federal Reserve conducted monetary policy during the federal funds rate normalization period mainly by setting the IOER and ON RRP rates equal to the upper and lower limits of its target range for the federal funds rate, respectively (Federal Reserve System, 2016;Ihrig & Wolla, 2020;Wolla, 2019). That is, starting from December 2015, because of ample reserves in the banking system, instead of influencing the federal funds 47 Although the Federal Reserve was initially authorized by the U.S. Congress to pay interest on reserves only from 2011, it was later allowed to begin this operation in October 2008 due to the financial crisis (Federal Reserve System, 2016).…”

“…When the FOMC establishes that an open market operation is needed to achieve or maintain the target federal funds rate, it instructs the Open Market Desk (the policyimplementing entity of the Federal Reserve, often called the Desk) at the Federal Reserve Bank of New York to conduct the operation(Federal Reserve System, 2016). They are called open market operations because the securities purchases and sales are made through competitive auctions between the Desk and all eligible primary dealers, not through direct interactions between the Desk and the U.S. Treasury or U.S. government agencies(Federal Reserve System, 2016;Hopper, 2019).31 Open market operations influence the level of the federal funds rate by directly affecting the quantity of reserves in the banking system(Federal Reserve System, 2016;Ihrig & Wolla, 2020;Wolla, 2019). In other words, although the Federal Reserve does not directly set the level of the federal funds rate, it easily affects it by setting a target for it and altering the quantity of bank reserves through open market operations.…”

Fighting Inflation More Effectively Without Transferring Central Banks’ Profits to Banks

“…An increase in the interest rate on bank reserves (deposit rate) is then transmitted into an increase in the money market interest rate and to the whole structure of interest rates (Ihrig and Wolla(2020), Baker and Rafter(2022)). Today such an increase in the interest rate is necessary to fight inflation.…”

“…The central bank would set a target interbank interest rate and would guide the market rate towards this target by manipulating the supply of reserves. This operating procedure would then determine the interbank rate without the need for the central bank to remunerate bank reserves (see Ihrig and Wolla(2020) for more detail).…”