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Since its inception in the early nineteenth century, the U.S. commercial paper market has grown to become a key source of short-term funding for major businesses, with issuance averaging over $100 billion per day. In the fall of 2008, the commercial paper market achieved national prominence when increasing market stress caused some to fear that, given its size and importance, the market's failure would sharply worsen the recession. The Department of the Treasury and Federal Reserve enacted programs targeted at providing credit and liquidity to restore investor confidence. The authors review the history of the commercial paper market, describe its structure and key relationships to money market mutual funds, and present a detailed discussion of the crisis in the market, including the resulting Federal Reserve programs. [ABSTRACT FROM AUTHOR]

Opinion. Comments on the paper by Jerome Stein about the Federal Reserve's role in improving the economic condition of the United States. Function of the M2 aggregate as a monetary indicator to guide monetary policy; Federal Reserve's achievement of price stability; Relationship between M2 growth and a particular economic variable; Interpretation of evidence on monetary indicators.

This article describes the origins and development of the federal funds market from its inception in the 1920s to the early 1950s. We present a newly digitized daily data series on the federal funds rate from April 1928 through June 1954. We compare the behavior of the funds rate with other money market interest rates and the Federal Reserve discount rate. Our federal funds rate series will enhance the ability of researchers to study an eventful period in U.S. financial history and better understand how monetary policy was transmitted to banking and financial markets. For the 1920s-30s, our series is the best available measure of the overnight risk-free interest rate, better than the call money rate that many studies have used for this purpose. For the 1940s-50s, our series provides new information about the transition away from wartime interest rate pegs culminating in the 1951 Treasury-Federal Reserve Accord. [ABSTRACT FROM AUTHOR]

This paper investigates the effectiveness of one of the Federal Reserve's unconventional monetary policy tools, the term auction facility (TAF). At issue is whether the TAF reduced the spread between the London interbank offered rate (LIBOR) rates and equivalent-term Treasury rates by reducing the liquidity premium embedded in LIBOR rates. This paper suggests that rather than reducing the liquidity premium in LIBOR rates, the announcement of the TAF increased the risk premium in financial and other bond rates because market participants interpreted the announcement by the Fed and other central banks as a sign that the financial crisis was worse than previously thought. Evidence is presented that supports this hypothesis. [ABSTRACT FROM AUTHOR]

Discusses the use of the monetary aggregate M2+ as a monetary policy proposed by the US Federal Reserve Board. Specification of the demand for M2+; Issues concerning the stability, indicator property and controllability of the monetary aggregate; Demand functions for M2+; Problems associated with the adoption of M2+; Effects on the economic and monetary policy.

Opinion. Comments on the paper by Anderson and Kavajecz on the historical perspective of money aggregates of the Federal Reserve System in the United States. Importance of data on monetary aggregates to academic and policy research on macroeconomics; Focus on why researchers doing empirical monetary economics should care about the details of the measurement of monetary aggregates; More.

Hernández-Murillo and Owyang (2006) showed that accounting for spatial correlations in regional data can improve forecasts of national employment. This paper considers whether the predictive advantage of disaggregate models remains when forecasting subnational data. The authors conduct horse races among several forecasting models in which the objective is to forecast regional- or state-level employment. For some models, the objective is to forecast using the sum of further disaggregated employment (i.e., forecasts of metropolitan statistical area [MSA]-level data are summed to yield state-level forecasts). The authors find that the spatial relationships between states have sufficient predictive content to overcome small increases in the number of estimated parameters when forecasting regional-level data; this is not always true when forecasting state- and regional-level data using the sum of MSA-level forecasts. [ABSTRACT FROM AUTHOR]

It is commonly believed that the Fed's ability to control the federal funds rate stems from its ability to alter the supply of liquidity in the overnight market through open market operations. This paper uses daily data compiled by the author from the records of the Trading Desk of the Federal Reserve Bank of New York over the period March 1, 1984, through December 31, 1996: He analyzes the Desk's use of its operating procedure in implementing monetary policy and the extent to which open market operations affect the federal funds rate--the liquidity effect. The author finds that the operating procedure was used to guide daily open market operations; however, there is little evidence of a liquidity effect at the daily frequency and even less evidence at lower frequencies. Consistent with the absence of a liquidity effect, open market operations appear to be a relatively unimportant source of liquidity to the federal funds market. [ABSTRACT FROM AUTHOR]

Comments on the model developed by John Taylor which illustrated how the United States Federal Reserve Bank System affect the federal funds rate. Functions of federal reserve banks for depository institutions; Implications of Taylor's model on the daily management of Federal bank reserves; Evaluation of the Trading Desk reaction function used by Taylor to describe the Desk operations of the Federal Reserve.

This article uses the Community Impact Survey implemented by the Federal Reserve System in 2021 to identify COVID-19 disruptions on low- to moderate-income communities. I find that communities that were primarily of Color were more likely to be significantly disrupted by COVID-19 than White communities. I also assess the importance of certain challenges, such as returning to work or unequal access to government relief, in shaping the observed demographic differences in disruption. [ABSTRACT FROM AUTHOR]

In August 2020, the Federal Reserve unveiled its new strategic framework. One major objective of the Fed was to address its concerns over the potential consequences for the conduct of monetary policy when the policy rate was constrained by its effective lower bound. This article concludes that there are significant flaws in the new strategy and that it encourages a more discretionary approach to monetary policy and increases the risks of policy errors. The new framework is an overly complex and asymmetric flexible average inflation targeting scheme that introduces a significant inflationary bias into policy and expands the scope for discretion by broadening the Fed's employment mandate to "maximum inclusive employment." In a postscript, the article describes how quickly the flaws have been revealed and urges a reset toward a more systematic and coherent strategy that is transparent and broadly understood by the public. [ABSTRACT FROM AUTHOR]

This article describes the circumstances of and motivations for the quantitative easing programs of the Federal Reserve, Bank of England, European Central Bank, and Bank of Japan during the recent financial crisis and recovery. The programs initially attempted to alleviate financial market distress, but this purpose soon broadened to include achieving inflation targets, stimulating the real economy, and containing the European sovereign, debt crisis. The European Central Bank and Bank of Japan focused their programs on direct lending to banks—reflecting the bank-centric structure of their financial systems—while the Federal Reserve and the Bank of England expanded their respective monetary bases by purchasing bonds. [ABSTRACT FROM AUTHOR]

The financial crisis that began in the summer of 2007 took a turn for the worse in September 2008. Until then, Federal Reserve actions taken to improve the functioning financial markets did not affect the monetary base. The unusual lending and purchase of private debt was offset by the sale of Treasury securities so that the total size of the balance sheet of the Fed remained relatively unchanged. In September, however, the Fed stopped selling securities as it made massive purchases of private debt and issued hundreds of billions of dollars in short-term loans. The result was a doubling of the size of the monetary base in the final four months of 2008. This article discusses the details of the programs that the Fed has initiated since the crisis began, shows which programs have grown as the monetary base grew, and discusses some factors that will determine whether this rapid increase in the monetary base will lead to rapid inflation. [ABSTRACT FROM AUTHOR]

The analysis in this article was presented to the Federal Open Market Committee as background for its discussion of the Federal Reserve's review of monetary policy strategy, tools, and communication practices. The Committee discussed issues related to the review at five consecutive meetings from July 2019 to January 2020. References to the Federal Open Market Committee's current framework for monetary policy refer to the framework articulated in the "Statement on Longer-Run Goals and Monetary Policy Strategy" first issued in January 2012 (FOMC, 2021). [ABSTRACT FROM AUTHOR]

Comments on the use of monetary aggregate M2+ as a monetary policy proposed by the US Federal Reserve Board. Instability of money-demand; Efficiency of the money-demand models; Discussion of the issue on whether to add bond or bond and stock funds to M2; Differences in the surge in mutual funds; Policy recommendation for the US Federal Reserve Board.

Comments on the new monetary aggregate M2+ index as a monetary policy proposed by the US Federal Reserve Board. Issues affecting the implementation of M2+ index; Riskiness of the investment rate of return on an asset; Legality of the bond or stock mutual funds as a means of payment; Conflict between the existence of risky return and the contribution of liquidity to the economy.

I survey monetary policy strategy, regulation, and central banks' mandates and independence. I do not think strongly negative interest rates, vastly expanded quantitative easing, or extensive forward guidance can or should stimulate in the next recession. I advocate a price-level target and that the Fed fix the spread between indexed and nominal debt. I argue for a large balance sheet of interest-paying reserves, achieved via a flat supply curve, though I argue that the Treasury should issue reserve-like debt as well to take up much of that role. Central banks should avoid the temptation toward ever-expanding roles including "macroprudential" policy, discretionary credit cycle management, asset price targeting, and using their regulatory power to advance social and political goals such as climate change and inequality. Only limited scope of action to areas of agreed technocratic competence will salvage central banks' and international institutions' useful independence. (JEL E52, E58, E61, G28). [ABSTRACT FROM AUTHOR]

Banks' liquidity management practices are fundamental to understanding the implementation and transmission of monetary policy. Since the Global Financial Crisis of 2007-09, these practices have been shaped importantly by the liquidity coverage ratio requirement. Given the lack of public data on how banks have been meeting this requirement, we construct estimates of U.S. banks' high-quality liquid assets (HQLA) and examine how banks have managed these assets since the crisis. We find that banks have adopted a wide range of HQLA compositions and show that this empirical finding is consistent with a risk-return framework that hinges on banks' aversion to liquidity and interest rate risks. We discuss how various regulations and business model choices can drive HQLA compositions in general, and connect many of the specific compositions we see to banks' own public statements regarding their liquidity strategies. Finally, we highlight how banks' preferences for the share of HQLA met with reserves affect the Fed's monetary policy implementation framework. [ABSTRACT FROM AUTHOR]

This article examines how the U.S. banking system responded to the founding of the Federal Reserve System (Fed) in 1914. The Fed was established to bring an end to the frequent crises that plagued the U.S. banking system, which reform proponents attributed to the nation's "inelastic" currency stock and dependence on interbank relationships to allocate liquidity and operate the payments system. Reform advocates noted that banking panics tended to occur at times of the year when the demands for currency and bank loans were normally at seasonal peaks and money markets were at their tightest. Moreover, they blamed the interbank system, upon which the banking system depended for seasonal accommodation and interregional payments, for transmitting shocks throughout the banking system. The article finds that after the Fed's founding, country national banks were much less dependent on correspondent banks for seasonal liquidity and that peaks in lending by individual Reserve Banks aligned with the liquidity needs of banks in their districts. Further, the article shows that after the Fed's founding, banks generally were less liquid and relied more heavily on deposits for funding, consistent with the idea that banks viewed the Fed as a reliable source of liquidity. The return of banking panics during the Great Depression, however, showed that the Fed was not, in fact, up to the challenge of serving as a full-fledged lender of last resort. (JEL E58, G21, N21, N22) [ABSTRACT FROM AUTHOR]

Since 2007-09, the Federal Reserve has pursued a very aggressive monetary policy strategy. This strategy has been associated with healthy labor market conditions, moderate economic growth, and inflation--netting out the effects of a major oil price shock--that is close to the Federal Open Market Committee's (FOMC's) 2 percent target. Thus, with the economy returning to normal, it is natural for the FOMC to begin the process of exiting its highly accommodative policy. The FOMC has laid out several well-defined steps for this process. This strategy may be called central bank orthodoxy, since it is a natural extension of the classical view. However, three challenges to this orthodoxy have developed. Although each challenge is interesting and potentially helpful, the orthodox view provides a better basis for devising near- and medium-term monetary policy decisions. [ABSTRACT FROM AUTHOR]

Because of the Federal Reserve's unconventional approaches to monetary policy during the Great Recession and recovery, the Fed now finds itself in an unconventional situation. Short-term nominal interest rates have been close to zero for more than six years, and the Fed's balance sheet is currently more than four times as large as in 2007. This article explains how and why the Fed got into this situation and the challenges this creates in returning Fed policy to "normal"-a state in which the Fed's nominal interest rate target is above zero and its balance sheet is reduced in size. [ABSTRACT FROM AUTHOR]

This article investigates the use of factor-based methods for predicting industry-wide bank stress. Specifically, using the variables detailed in the Federal Reserve Board of Governors' bank stress scenarios, the authors construct a small collection of distinct factors. We then investigate the predictive content of these factors for net charge-offs and net interest margins at the bank industry level. The authors find that the factors do have significant predictive content, both in and out of sample, for net interest margins but significantly less predictive content for net charge-offs. Overall, it seems reasonable to conclude that the variables used in the Fed's bank stress tests are useful for identifying stress at the industry-wide level. The final section offers a simple factor-based analysis of the counterfactual bank stress testing scenarios. [ABSTRACT FROM AUTHOR]

This article describes the joint evolution of Federal Reserve policy and the study of the impact of monetary policy surprises on high-frequency asset prices. Since the 1970s, the Federal Open Market Committee has clarified its objectives and modified its procedures to become more transparent and predictable. Researchers have had to account for these changes to procedures and perceived objectives in developing methods to study the effects of monetary surprises. Unexpected changes to the Committee's federal funds target and postmeeting statements strongly and consistently affect asset prices, including interest rates, exchange rates, and (for target changes) stock prices. The study of monetary surprises on asset prices provides important insight for policymakers, financial market participants, and economic models. [ABSTRACT FROM AUTHOR]

The Board of Governors of the Federal Reserve System is responsible for two of the most widely used datasets containing information about U.S. household balance sheets: the quarterly macro-level Financial Accounts of the United States (FA, formerly known as the Flow of Funds Accounts) and the triennial micro-level Survey of Consumer Finances (SCF). The FA is very timely, but the data can be used only to describe the household sector as a whole. The SCF provides the micro-level detail needed to capture heterogeneity in household finances, but the data are available only with a long lag. The authors' key contribution in this article is their use of the FA dataset and other macro data sources to "age" the microlevel SCF data forward through time to generate a representative sample for current-quarter policy analysis. They use this aging approach to compare and contrast pre- and post-recession trends in key indicators, such as net worth, debt-to-income ratios, debt service-to-income ratios, and housing loanto- value ratios across families grouped by characteristics including income, age, and geography. [ABSTRACT FROM AUTHOR]

The authors use the Federal Reserve's Survey of Consumer Finances to document a boom in home ownership and mortgage borrowing among young families in the years leading up to the recent financial crisis. Many young families lost more of their wealth during the downturn than middle-aged and older families. The authors find that about three-quarters of the decline in the average young family's wealth between 2007 and 2010 was due to its exposure to residential real estate. For middle-aged and older families, housing losses contributed about 53 percent and 40 percent of the total decline in wealth, respectively. Regression evidence suggests that young families' wealth, on average, was unusually highly concentrated in housing and these families' debt burdens were extremely high at the peak of the boom. [ABSTRACT FROM AUTHOR]

Numerous commentaries have questioned both the legality and appropriateness of Federal Reserve lending to banks during the recent financial crisis. This article addresses two questions motivated by such commentary: Did the Federal Reserve violate either the letter or spirit of the law by lending to undercapitalized banks? Did Federal Reserve credit constitute a large fraction of the deposit liabilities of failed banks during their last year before failure? The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) imposed limits on the number of days that the Federal Reserve may lend to undercapitalized or critically undercapitalized depository institutions. The authors find no evidence that the Federal Reserve ever exceeded statutory limits during the recent financial crisis, recession, and recovery. In most cases, the number of days that Federal Reserve credit was extended to an undercapitalized or critically undercapitalized depository institution was appreciably less than the number of days permitted under law. Furthermore, compared with patterns of Fed lending during 1985-90, the authors find that few banks that failed during 2008-10 borrowed from the Fed during their last year prior to failure, and even fewer had outstanding Fed loans when they failed. Moreover, Federal Reserve loans averaged less than 1 percent of total deposit liabilities among nearly all banks that did borrow from the Fed during their last year. It is impossible to know whether the enactment of FDICIA explains differences in Federal Reserve lending practices during 2007-10 and the previous period of financial distress in the 1980s. However, it does seem clear that Federal Reserve lending to depository institutions during the recent episode was consistent with the congressional intent of this legislation. [ABSTRACT FROM AUTHOR]

The Federal Reserve is said to have a dual mandate of price stability and full employment. While the Fed has mentioned price stability as one of its primary goals, it has been reluctant to mention employment as a separate policy objective, preferring instead to state that maximum employment could best be achieved by achieving price stability. This hesitance ended with the December 2008 policy directive in which the Federal Open Market Committee (FOMC) noted its objectives were "maximum employment and price stability." Operationally equivalent language first appeared in the FOMC's policy statement in September 2010 and has appeared in every subsequent statement. This article reviews the FOMC transcripts and biannual statements to Congress to provide some insight into the Fed's historical reluctance to mention employment as an independent policy objective. The FOMC documents do not point to a specific reason for the historical reluctance, but they provide a few clues. Perhaps more importantly, they point to two changes that may explain the recent change in language: the increased emphasis on economic stabilization and the shift in emphasis from the growth rate of output to the level of output. [ABSTRACT FROM AUTHOR]

The Federal Reserve is not formally inflation targeting. Nevertheless, it is commonly believed to be an implicit inflation targeter. The evolution to inflation targeting occurred because central banks, most importantly the Federal Reserve, demonstrated that monetary policy could control inflation. As central banks' credibility for keeping inflation low increased, policy actions became increasingly focused on affecting the growth rate of employment or the unemployment rate. The author argues that this change in emphasis is unlikely to generate positive benefits; more importantly, it endangers the continued effectiveness, and perhaps even the viability, of inflation targeting. [ABSTRACT FROM AUTHOR]

In 1913, Congress purposefully created the Federal Reserve as an independent central bank, which created a fundamental tension: how to ensure the Fed remains accountable to the electorate without losing its independence. Over the years, there have been changes in the Fed's structure to improve its independence, credibility, accountability, and transparency. These changes have led to a better institutional design that makes U.S. policy credible and based on sound economic reasoning, as opposed to politics. In times of financial and economic crisis, there is an understandable tendency to reexamine the structure of the Federal Reserve System. A central bank's independence, however, is the key tool to ensure a government will not misuse monetary policy for short-term political reasons. (JEL E52, E58) [ABSTRACT FROM AUTHOR]

How did problems in a relatively small portion of the home mortgage market trigger the most severe financial crisis in the United States since the Great Depression? Several developments played a role, including the proliferation of complex mortgage-backed securities and derivatives with highly opaque structures, high leverage, and inadequate risk management. These, in turn, created systemic risk-that is, the risk that a triggering event, such as the failure of a large financial firm, will seriously impair financial markets and harm the broader economy. This article examines the role of systemic risk in the recent financial crisis. Systemic concerns prompted the Federal Reserve and U.S. Department of the Treasury to act to prevent the bankruptcy of several large financial firms in 2008. The authors explain why the failures of financial firms are more likely to pose systemic risks than the failures of nonfinancial firms and discuss possible remedies for such risks. They conclude that the economy could benefit from reforms that reduce systemic risks, such as the creation of an improved regime for resolving failures of large financial firms. [ABSTRACT FROM AUTHOR]

This article was originally published in the Board of Governors of the Federal Reserve System Open Market Policies and Operating Procedures—Staff Studies, July 1971. It is reprinted here as an addendum to these conference proceedings. [ABSTRACT FROM AUTHOR]

Focuses on the trends in the efficiency of U.S. Federal Reserve System check processing operations. Overview of the Monetary Control Act of 1980; Details of the check clearing process of the Federal Reserve; Information on the mathematical model used to estimate the check office production.

Presents information on designing a central bank law. Principles for designing an optimal central bank law; Inflation target; Discussion on central bank independence; Organization of the U.S. Federal Reserve System; Importance of transparency.

Examines whether U.S. Federal Reserve settlement effects have also appeared in the overnight London interbank offer rate (LIBOR) since the Federal Reserve removed the reserve requirements on Eurocurrency liabilities. Significance of the Monetary Control Act in 1980; Information on the rate change; Variance patterns unique to reserve account settlement with the Federal Reserve; Relationship between LIBOR and British bank settlement. INSET: THE FEDERAL RESERVE'S STATUTORY RESERVE REQUIREMENTS.

Examines alternative views about monetary policy within the U.S. Federal Reserve System from the mid-1960s to the mid-1970s. Information on macroeconomic conditions from the 1950s through the 1970s; Development of monetary policy from 1951 to 1966; Views of Darryl Francis, president of the Federal Reserve Bank of Saint Louis from 1966 to 1975, on key policy issues.

Examines modern central banking with a focus on the U.S. Federal Reserve System and the European Central Bank. Structure and appointment process of the key policymakers at the central banks; Tasks of central banks; Goals of monetary policy. INSETS: THE PATH TO MONETARY UNION;INSTITUTIONS OF THE EUROPEAN UNION;PRESS RELEASES FOLLOWING POLICY MEETINGS OF THE FOMC AND ....