Keynote Speech: Federal Reserve Policy in the Post-Crisis Period

Abstract

The Federal Open Market Committee (FOMC) engaged in a series of extraordinary monetary policy actions in the wake of the Global Financial Crisis of 2007–2008 to support economic activity in the United States. Interest rates were lowered to their effective lower bound and the Fed’s balance sheet was greatly expanded through a series of large-scale asset purchase programs. As the U.S. economy has recovered, “normalization” of monetary policy (which will be data-dependent) has drawn closer. This article reviews some factors that may impact the post-normalization course of monetary policy.

KEYWORDS:

• equilibrium real interest rate
• monetary policy normalization
• Taylor rule

Notes

¹ The publication of projected policy rate paths was pioneered by the Reserve Bank of New Zealand in 1997, followed by the Norges Bank in 2005.

² See, for example, Taylor (2009).

³ See, for example, Taylor (2014).

⁴ The effective zero lower bound is not quite zero. Since December 2008, the FOMC has maintained a target range for the federal funds rate of 0 to 25 basis points. The Bank of England has maintained Bank Rate at 50 basis points since March 2009. The Bank of Japan cut its uncollateralized overnight call rate to 10 basis points in December 2008, and to 5 basis points in October 2010. With the launch of “quantitative and qualitative monetary easing” by the Bank of Japan on April 4, 2013, the main operating target for money market operations changed from the uncollateralized overnight call rate to the monetary base. The ECB cut its main refinancing rate to 1% in May 2009, and engaged in a mini-tightening cycle in 2011 that was quickly reversed. The ECB then cut rates in a series of moves that brought them to their current level of 5 basis points in the latter half of 2014. Unlike the other major advanced economy central banks, the ECB has also dipped its feet into the uncharted waters of negative interest rates, setting its deposit rate at −10 basis points in the middle of 2014, lowering it further to −20 basis points in September of 2014. Other advanced economy central banks have experimented even further with negative interest rates in the wake of the Global Financial Crisis.

⁵ The G7 countries are the United States, Japan, Germany, France, the United Kingdom, Italy, and Canada.

⁶ See IMF (2014), Figure 3.3, Panel 1.

⁷ See Feldstein (2005).

⁸ For earlier studies of the relationship between demographics and real interest rates, see Batini, Callen, and McKibbin (2006); Kara and Von Thadden (2010); Ikeda and Saito (2012); and Backus, Cooley, and Henriksen (2014).