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The Fed’s New Monetary Policy tools

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Reply Post: Try to point out economic ideas/concepts that could have been used to strengthen your classmate’s analysis or may not have been used clearly or correctly. Just saying you agree, or disagree, or like the points made, or didn’t think of that, will not earn you many points. Write in complete sentences that are proofed for CUPS. Again, you should compose in Word and then copy and past your Reply in myLearning. Reply Post should be about 50 words.
RUBRIC ATTACHED.
The original Post is pasted below….
Classmates Original Post to Reply to:
The Fed’s New Monetary Policy tools (Ihrig & Wolla, 2020) discusses the change in monetary policy over the years and offers guidance for people who teach on topics such as the Federal Reserve and monetary policy. The article notes that before 2008 the Fed (Federal Reserve) primarily used the buying and selling of U.S. Treasury securities, a tool called open market operations, to adjust FFR (Federal funds rate) which stabled prices and worked to keep the maximum employment rate. This was called the limited-reserves framework. Then in 2007-2008, there was a financial crisis that was among the worst that the world had ever seen. This financial crisis caused the Fed to revisit its approach to controlling the economy using monetary policy. A new framework was then established because the old model was no longer working, this new framework was called the ample-reserves framework. The ample-reserves framework relies on the Fed’s administered rates, such as the Interest on Reserves Balances (IROB), to influence the FFR. The Fed can use these rates to shift the FFR higher or lower based on raising or lowering the IROB rates. The Fed also used this response for the most recent economic issue, the COVID pandemic.
The next article How the Fed Has Responded to the COVID-19 Pandemic (Ihrig, Weinbach, & Wolla, 2020) discussed the 3 actions that the Fed used in response to the COVID pandemic. The first action was right where the last article left off, lowering policy rates and the target range for the FFR. The 2nd was the Fed ramped up its purchases of Treasury securities and mortgage-backed securities using open market operations. The Fed did this to pump cash into the US economy and keep public trust high. The 3rd action was to support the flow of credit to businesses of all sizes by introducing numerous temporary funding facilities. The most common of these facilities was the Paycheck Protection Program and the Main Street Lending Program.
When interest rates are at a near-zero rate, the Federal Reserve must find new ways to conduct monetary policy to stimulate the economy. Using the adjustment of rates is no longer an option when they cannot go any lower. Another big problem with near-zero rates is that the lower the interest rate, the lower the incentive banks have to make loans to consumers and businesses because there is less reward for their risk. An article from the Federal Reserve Bank of Cleveland talks about using monetary policy for quantitative easing when done in a zero-interest environment. They state that “To affect M1, banks need to lend the cash out to the private sector, which in turn will redeposit part of this cash into checking accounts, thereby increasing money in circulation. Because open market operations will not increase the money supply when short-term interest rates are zero, they can’t be used to increase either real economic activity or prices.” (Federal Reserve Bank of Cleveland, 2009)
The COVID pandemic caused everyone in this world to take action at some point. The actions that the Fed took were a necessary boost for economic recovery, but I believe they do carry a concern. For instance, what would the central bank be able to do if there was a deflationary shock? Because rates are already close to zero, they could not use lowering rates as a monetary policy weapon. Their inability to fight the deflationary shock by lowering rates could eventually crush economic output. Another concern that I have is with the facilities added to support the flow of credit to businesses. This again was a necessary action, but it comes with the consequence of fraud. How much money was stolen by establishing these programs? The Department of Justice already has many open cases of investigation. One is a California man who is being convicted of a 27 million dollar PPP fraud scheme. According to Aura, more than 15% of PPP loans had at least one indication of fraud. (Bray, 2022)
References
Bray, C. (2022, February 23). AURA. Retrieved from Is PPP Loan Fraud The Largest Fraud Of All Time?: https://www.aura.com/learn/ppp-loan-fraud
Federal Reserve Bank of Cleveland. (2009, 12 21). Conducting Monetary Policy When Interest Rates Are Near Zero. Retrieved from Federal Reserve Bank of Cleveland: https://www.clevelandfed.org/en/newsroom-and-events/publications/economic-commentary/economic-commentary-archives/2009-economic-commentaries/ec-20091009-conducting-monetary-policy-when-interest-rates-are-near-zero.aspx#:~:text=Because%20open%20market%20op
Ihrig, J. E., Weinbach, G., & Wolla, S. A. (2020, August 12). How the Fed Has Responded to the COVID-19 Pandemic. Retrieved from Federal Reserve Bank of St. Louis: https://www.stlouisfed.org/open-vault/2020/august/fed-response-covid19-pandemic
Ihrig, J., & Wolla, S. A. (2020, August). The Fed’s New Monetary Policy Tools. Retrieved from Federal Reserve Bank of St. Louis Economic Research: https://research.stlouisfed.org/publications/page1-econ/2020/08/03/the-feds-new-monetary-policy-tools

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