Robert McCauley, 30 March 2021

US banks currently hold almost $4 trillion in Fed deposits, as a result of the ongoing balance sheet expansion by the Federal Reserve. Meanwhile, a year-long exclusion of Fed deposits and US Treasuries from bank capital rules is set to expire on 31 March. This column proposes a simple, feasible, and mandate-consistent strategy to replace $3 trillion in deposits with Treasury bills. These Treasuries could be held not only by banks, but also by mutual funds and non-residents, and this substitution could also save taxpayers money.

Gavin Goy, Meilina Hoogland, Annelie Petersen, 15 March 2021

On the back of fiscal accommodation, a rebounding economy, and the Federal Reserve’s newfound tolerance for inflation overshoots, market-based inflation measures have surged, triggering concerns of an overheating of the US economy. By decomposing recent yield curve movements, this column shows that the steepening of the US Treasury curve corresponds with higher real term premia and a boost in both inflation expectations and the inflation risk premium. Lower real rate expectations suggest that markets do not yet expect the Fed to lean against the fiscal expansion. Simultaneously, the width of the distribution suggests that markets are relatively uncertain about the exact degree of overshooting the Fed will allow before stepping in. 

Gene Ambrocio, Andrea Ferrero, Esa Jokivuolle, Kim Ristolainen, 06 March 2021

Central banks often have inflation targets at the centre of their monetary policy regimes. This column presents survey data from 613 leading economists to explore their views on these inflation targets and wider policies within their countries of residence. The results suggest that maintaining the prevailing inflation target (for central banks that have one) has more support than changing it does. But more respondents are pessimistic about central banks’ ability to meet these targets, particularly in the euro area.

Mattia Bevilacqua, Lukas Brandl-Cheng, Jon Danielsson, Jean-Pierre Zigrand, 28 January 2021

While the direct economic consequences of Covid-19 have been significant, the impact on the financial markets has been more nuanced. This column uses a unique data set on the financial markets’ fears and perceptions of long-run financial risk to identify how Covid-19, and particularly Fed policy responses to Covid-19, affected global market fears. While some Fed interventions had little or no impact on market fear, the most powerful were the US dollar swap lines, which strongly reduced the perceived likelihood of global market losses decades into the future. The results suggest that the Fed's relative global role has been strengthened, possibly at the cost of increased moral hazard.

Gauti Eggertsson, Sergey Egiev, Alessandro Lin, Josef Platzer, Luca Riva, 21 October 2020

The Federal Reserve has recently announced a new policy strategy of average inflation targeting. The column argues that while this is unambiguously a positive step, it may not – under all circumstances – subscribe to a sufficiently aggressive make-up strategy when the zero lower bound is binding. This is particularly likely to be the case if episodes of high unemployment are not associated with material fall in inflation, a scenario that seems empirically relevant. The authors suggest alternatives that could do better, such as a targeting rule that treats the dual objective of the Federal Reserve in a symmetric way, or one that aims at minimising cumulative deviation of nominal GDP from trend.

Olivier Coibion, Yuriy Gorodnichenko, Edward S. Knotek II, Raphael Schoenle, 30 September 2020

On 27 August 2020, the Federal Reserve announced the adoption of a new strategy of ‘average inflation targeting’, which is to replace traditional inflation targeting. This column uses a daily survey of US households to study how this announcement affected inflation expectations. It finds a small uptick in the share of households reporting to have heard news about monetary policy on the day of the announcement, but hearing about the news did not appear to affect their expectations. Even providing households with information on average inflation targeting directly did not change expectations relative to households who received information on traditional inflation targeting.

Ignazio Angeloni, 14 September 2020

The long-awaited outcome of the Federal Reserve’s monetary strategy review is finally out. This column argues that while the ‘Powell doctrine’ responds to a genuine need to address issues in the Fed’s policy framework, it also introduces complexities in the interpretation and implementation of monetary policy which are likely to become more apparent over time. The hurdles involved do not have easy solutions, and other central banks pondering their own monetary policy framework are well advised to take heed.

Itamar Drechsler, Alexi Savov, Philipp Schnabl, 11 September 2020

In a recent speech in Jackson Hole, Fed Chair Jay Powell laid out the Fed’s new monetary policy framework.  Under this framework, the Fed will allow inflation to run above its 2% target in order to boost employment following a downturn.  The new framework marks a departure from the perceived wisdom of the 1970s’ Great Inflation.  Under this perceived wisdom, the Fed must respond aggressively to rising inflation or risk losing its credibility and letting inflation spiral out of control.  New research on the Great Inflation challenges this perceived wisdom and offers a new explanation for what really drives inflation.  Instead of Fed credibility, this explanation puts the financial system and how it transmits monetary policy front and centre.  In doing so, it reconciles the 1970s with the current environment and provides a foundation for understanding why the Fed’s new framework is unlikely to trigger runaway inflation.

Gregor Boehl, Gavin Goy, Felix Strobel, 30 August 2020

Despite their pivotal role, the macroeconomic effects of large-scale asset purchases, known as quantitative easing, remain open to debate. This column provides insights from a structural investigation of the macroeconomic effects of the Federal Reserve’s quantitative easing programme during the global financial crisis. In line with the general consensus, the results suggest that asset purchases substantially eased borrowing conditions and facilitated new investment. The rise in investment led to an increase in the productive capacity which, in turn, lowered firms’ marginal cost. These supply-side effects dominated demand-side effects in determining the response of inflation, leading to a mild disinflationary effect.

Robert McCauley, 26 August 2020

On 23 March 2020, the Federal Reserve announced that it would buy investment grade corporate bonds, and on 9 April set the amount at up to $250 billion and extended the purchase to junk bonds. This column shows that these interventions succeeded in stabilising credit markets: prices lifted and dealing spreads narrowed. However, emergency lending powers provide an inadequate basis for Federal Reserve operations in corporate bonds. In light of these findings, congressional authority to buy and to sell corporate bonds alongside US Treasuries would help to align Federal Reserve operations with what has become a capital-market centred financial system

Willem Buiter, 03 July 2020

The US Federal Reserve – the world’s most important central bank – is not in a good place. This column outlines three flaws in the operating practices of the Fed – (i) its refusal to adopt negative policy rates, (ii) the build-up of significant credit risks through non-transparent (quasi-)fiscal actions, and (iii) stress testing analysis which fails to account for the severity of the COVID-19 crisis. It proposes a number of ways forward, including a symmetric policy rate around zero, a temporary ban on dividend payments, new equity issuance, and conducting a comprehensive stress test of the financial system.

Lukas Hoesch, Barbara Rossi, Tatevik Sekhposyan, 07 March 2020

The information channel of monetary policy theory – whereby economic agents revise their beliefs after an unexpected monetary policy announcement not only because they learn about the current and future path of monetary policy, but also because they learn new information about the economic outlook – can potentially explain the puzzle of output increasing after a contractionary monetary policy shock. This column argues, however, that the information channel has disappeared in the US, perhaps due to the improved communication strategies implemented by the Federal Reserve.

Francesco Bianchi, Thilo Kind, Howard Kung, 25 January 2020

President Trump has frequently attacked the Federal Reserve, but if the markets believe that the Fed is immune to political pressure, these tweets should not affect expectations about future monetary policy. This column argues that this is not the case. Tick-by-tick fed funds futures data around the time of Trump tweets criticising the conduct of monetary policy suggest that market participants do not believe the Fed is fully independent.

Matthew Jaremski, David Wheelock, 15 August 2019

In response to the Global Crisis a decade ago, banks have tried to make themselves more resilient to shocks transmitted through interbank connections. But the opacity of interbank networks makes it difficult to measure the effectiveness of such policies. This column uses evidence from 20th century America to show how the founding of the Federal Reserve and the Great Depression affected interbank networks and lending practices. The creation of the Fed reduced network concentration and therefore contagion risk, but the system remained vulnerable to local panics.

Olivier Coibion, Yuriy Gorodnichenko, Michael Weber, 22 February 2019

Monetary policy increasingly relies on communication, but most households are unaware of inflation targets or monetary policy announcements. This column uses large-scale randomised controlled trial of US households to study how different forms of communication influence the inflation expectations of individuals. Reading the Federal Open Market Committee statement has about the same average effect on expectations as being told about the Federal Reserve’s inflation target. Reading a news article about the same statement cuts the effect by half. 

Ashoka Mody, Milan Nedeljkovic, 14 January 2019

The ECB’s actions in the wake of the Global Crisis have been described as hesitant, relative to other central banks. Based on analysis of financial markets' response to the ECB's interventions during the euro crisis, this column argues that central bank interventions are effective if they clearly signal a commitment to reinvigorating the economy and if they address the source rather than the symptom of financial stress. The ECB did not follow these principles, limiting its ability to improve financial market sentiment. 

James Hamilton, 12 October 2018

Quantitative easing policies have been used widely over the past decade. This column explores how markets responded to the announcements surrounding the three phases of the Fed’s quantitative easing operations. It also discusses a basic identification problem with high-frequency event studies, namely, that they cannot resolve whether the announcement mattered because it conveyed information about monetary policy or about economic fundamentals. 

Stephen Cecchetti, Kim Schoenholtz, 25 July 2018

Stefan Gerlach, Rebecca Stuart, 11 July 2018

Many market commentators are worried that the gradual flattening of the US term structure in recent months is indicative of an increased risk of a recession. This column argues that the term structure contained information about the likelihood of a future recession even before the establishment of the Federal Reserve, suggesting that the information content does not arise solely as a consequence of countercyclical monetary policy.


CEPR Policy Research