Every six weeks or so, the financial world watches as the Federal Open Market Committee (FOMC) decides on a target interest rate in the federal funds market. But what happens next? How do policymakers make sure that interest rates in the fed funds market trade within the target range?
Though not widely discussed, the framework that the FOMC uses to implement monetary policy has changed over the last decade and continues to evolve today. Before the financial crisis—when reserves were scarce—policymakers used one set of instruments to achieve the target rate. However, several important policy interventions introduced soon after the crisis drastically altered the landscape of the fed funds market. This new environment—with ample reserves—necessitated a new set of instruments for monetary policy implementation. Now, as the FOMC begins to unwind the effects of these policy interventions, the question arises: What happens next as the fed funds market converges to a “new normal”?
This article appeared in the Second Quarter 2019 edition of Economic Insights. Download and read the full issue.View the Full Article