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Monetary policy tools today: Paying interest on all those reserves

As the school year winds down, the FRED Blog offers some advice to new graduates: Learning about monetary policy is a lifelong endeavor, because its tools can change even if your textbook doesn’t. (See our “textbook lag” posts, part I and part II.)

One way monetary policy tools have changed is that, effective March 26, the Board of Governors of the Federal Reserve System reduced reserve requirement ratios to zero percent: In response to the COVID-19 pandemic, the Board eliminated reserve requirements for all depository institutions to facilitate lending to households and businesses.

As the FRED graph above shows, since 2008, the volume of excess reserves has vastly outpaced the volume of required reserves. In fact, the total amount of bank reserves held at Federal Reserve Banks is at an all-time high.

Another recent change in the policy environment is described in a Page One Economics essay, “A New Frontier: Monetary Policy with Ample Reserves.” The Federal Open Market Committee (FOMC) adjusts the interest rate on excess reserves (IOER) to adjust the federal funds rate. if your textbook was published before 2008, it’s not likely to include this monetary policy tool.

Now, take your tassel from your graduation cap and bookmark the FRED Blog in your browser to keep on learning.

How this graph was created: Search for and select “Total Reserve Balances Maintained with Federal Reserve Banks.” From the “Edit Graph” panel, use the “Add Line” feature to search for and add “Reserve Balances Required; Reserve Balance Requirements.” Use “Format” to select “Graph type: Area” and choose your colors.

Suggested by Diego Mendez-Carbajo.

View on FRED, series used in this post: RESBALNSW, RESBALREQW

National income’s connection to life expectancy

Tracking countries with high, middle, and low income

There is a strong positive correlation between life expectancy and national income: That is, higher (lower) life expectancy for a country’s population is associated with higher (lower) GDP for that country. The FRED graph above provides the supporting evidence.

The red, green, and purple lines plot life expectancy at birth for high-, middle-, and low-income countries, respectively, since 1960. We can see the relationship between life expectancy and national income through (1) the comparison of income groups at any point in time and (2) the time trend of each individual income group.

In any given year, life expectancy is always highest for high-income countries and lowest for low-income countries. Over time, the group average for life expectancy increases for all three income levels and their national incomes also rise.

This graph also shows that the life expectancy gap between high- and low-income countries narrows over time:

  • In 1960, the average life expectancy for high-income countries was 68.5 years, while the average for low-income countries was 39.3 years, a gap of 29.2 years.
  • In 2018, this gap shrank to 16.9 years, with an average life expectancy of 80.7 for high-income countries and 63.8 for low-income countries.

This global increase of life expectancy over the past 60 years, especially for low-income countries, has been a significant achievement in human history. However, there’s a bit of country-specific variation, even within the high-income group. The U.S. is good example.

The blue line shows life expectancy for the U.S., which is always included in the high-income group over the sample period. U.S. life expectancy was slightly higher than that of high-income countries overall in the 1960s, was about even with them in the 1970s and 80s, and started to lag behind in the 1990s and even declined in recent years. The 2018 data show that life expectancy in the U.S. is 2 years lower than the average for all high-income countries. In short, U.S. life expectancy has increased, though its rate of increase for the past half century is lower than life expectancy for other high-income countries.

How this graph was created: Search for and select one of the “life expectancy and income” series for income groups (high, middle, low), then use the “Edit Graph” panel’s “Add Line” feature to search for the rest, plus the life expectancy total for the U.S.

Suggested by YiLi Chien.


Frequency analysis of the word “pandemic”: The talk of the global village

FRED has more than 765,000 time series of data from 96 sources—some old, some new. One of the newest is a frequency analysis of the word “pandemic” from the Economist Intelligence Unit (EIU) country reports. Economists Hites Ahir, Nicholas Bloom, and Davide Furceri built the index number by counting the number of words related to pandemic episodes appearing in each country’s report, dividing that figure by the total number of words in the report and multiplying that ratio by 100,000.

These two GeoFRED maps show the index number for each country report during the fourth quarter of 2019 (above) and the first quarter of 2020 (below). Mentions of pandemics (disease outbreaks affecting many people at once) were identified only in certain countries in late 2019. Today, those mentions have spread worldwide.

How these maps were created: The original post referenced interactive maps from our now discontinued GeoFRED site. The revised post provides replacement maps from FRED’s new mapping tool. To create FRED maps, go to the data series page in question and look for the green “VIEW MAP” button at the top right of the graph. See this post for instructions to edit a FRED map. Only series with a green map button can be mapped.

Suggested by Diego Mendez-Carbajo and Maria Arias.

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