from Macro and Markets

Get Ready for Lift Off

August 10, 2015

Blog Post

More on:

Monetary Policy

While markets are debating whether the Fed will raise interest rates in September, a more challenging question is how will they implement that policy change.  There is a new blog by Stephen Cecchetti and Kim Schoenholtz that cuts through the clutter and clearly lays out how the Federal Reserve will operate monetary policy once it lifts off from the zero lower bound. As they note, their paper draws on a valuable primer by Federal Reserve economists Ihrig, Meade, and Weinbach that was recently released on the topic. (For disclosure purposes, I am married to one of the authors of the Fed paper.) Both are well worth reading.

Cecchetti and Schoenholtz note that the old system for policy tightening “is no longer functional, and will not be for some years to come, if ever.” They describe the new system as a corridor system, and trace out how that works with the interest rate on excess reserves (IOER) as the principal new tool for policy tightening, supplemented by additional instruments designed to absorb funds from banks and nonbanks. Their bottom line: “How well this new mechanism works will only become clear when the Fed actually tightens, so fasten your seatbelts and get ready for the ride.”

 

More on:

Monetary Policy

Up
Close