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Posts tagged with: "DFEDTARU"

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Unexpected changes to the benchmark U.S. interest rate

Discretion is the better part of valor

Quoting from the Board of Governors of the Federal Reserve System website: “The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Federal Reserve System… The FOMC schedules eight meetings per year, one about every six weeks or so. The Committee may also hold unscheduled meetings as necessary to review economic and financial developments.”

One of those unscheduled meetings took place on Sunday, March 15. At that time, the FOMC announced a reduction in the benchmark U.S. interest rate target range by a full percentage point. This decision was made ahead of the regularly scheduled March 17-18 meeting. How often does the FOMC do this? That is, how often does it change its monetary policy target without waiting for a regularly scheduled meeting? FRED can help us answer that question.

The purple bars in the FRED graph above show the change in the federal funds target rate (which is a series that was discontinued after December 16, 2008, and the green bars show the change in the federal funds target range (upper and lower limits). The spacing between the bars shows the pace of interest rate adjustments. Because the data are at a daily frequency (including Sundays), we can see details more easily if we zoom in…

In the graph above, we’ve zoomed in to the months between June 2004 and August 2006, showing 17 increases in the target rate, matched to the regular FOMC meetings. All the changes in the target rate were of the same size: 0.25% (or 25 basis points).

Now, look at the months between August 2007 and July 2009. You can see 10 decreases in the target rate: 8 were announced at the regular FOMC meetings and 2 were in between meetings (January 22 and October 8, 2008). The changes in the target rate were of different sizes, ranging from 0.25% to 0.75% (or 25 to 75 basis points). Note that the December 16, 2008, change in the target rate was accompanied by the implementation of the target range, with upper and lower limits.

Over the past 20 years, the FOMC has held 184 meetings, 30 of which were unscheduled. During the same period, the FOMC changed its monetary policy target 54 times, 7 of which occurred after unscheduled meetings, which amounts to 13% of all policy target changes. You can also keep track of this schedule yourself: The Federal Reserve Board publishes the list of meetings and the list of open market operations that have changed the monetary policy rate

How these graphs were created: Search for and select “federal funds target rate (DISCONTINUED)” (series ID DFEDTAR). From the “Edit Graph” panel, use the “Add Line” to search for and select “federal funds target range upper limit” (series ID DFEDTARU). Repeat for “federal funds target range lower limit” (series ID DFEDTARL). For all lines, change the units to “Change, Percent.” For the second and third graphs, adjust the time periods.

Suggested by Diego Mendez-Carbajo.

View on FRED, series used in this post: DFEDTAR, DFEDTARL, DFEDTARU

Fixing the “Textbook Lag” with FRED (Part II)

Monetary policy in a world of ample reserves

Your economics textbook may still say the Federal Reserve uses open market operations to influence the federal funds rate. But in today’s economy, the Fed uses different policy tools.

In simple terms, this is how monetary policy currently works: The FOMC sets a target range for the federal funds rate (FFR) and uses interest on excess reserves (IOER) and the overnight reverse repurchase agreement (ON RRP) facility to keep the FFR rate in the target range. (See our previous post for an introduction to this topic.)

The Fed pays IOER to banks holding reserves at the Fed, which offers those banks a safe, risk-free investment option. Arbitrage ensures that the FFR doesn’t drift too far from the IOER rate. If the FFR drifts much below the IOER rate, banks then have an incentive to borrow in the federal funds market at the lower FFR and deposit those reserves at the Fed to earn the higher IOER rate.

From December 16, 2008, to June 13, 2018, the IOER and ON RRP rates, respectively, served as the upper and lower limits of the FFR target range. The FFR moved between the two rates, but over time it has moved closer to the IOER—that is, the gap between the two has closed, as shown in the FRED graph above.

Again, because the IOER rate was set at the upper limit of the target range, as the FFR moved closer to the IOER rate, by definition it moved closer to the upper limit of the range. To ensure that the FFR remained within the range, the Fed has lowered the IOER rate by 5 basis points at three different times in the past year: June 13, 2018; December 19, 2018; and May 1, 2019. The IOER is now set 15 basis points below the upper limit of the target range.

These changes weren’t changes in monetary policy (which affects the choice of target range), but rather were slight adjustments to where the FFR sits within the range. Chairman Jerome Powell explained that the adjustments were intended to “move the federal funds rate closer to the middle of the target range” in his press conference on June 13, 2018. The changes can be seen on the FRED graph below: Prior to the June 13, 2018, adjustment, the upper limit of the FFR target range and the IOER rate were indistinguishable because IOER rate was set at the upper limit of the target range. After June 13, 2018, the IOER rate (green line) is below the upper limit of the FFR target range (red line).

These changes have ensured that the FFR has remained between the upper and lower limits of the range throughout the period, as illustrated by the FRED graph below.

How these graphs were created: For the first graph: Search for “interest rate on excess reserves,” select “Effective Federal Funds Rate (daily)” and “Interest Rate on Excess Reserves,” and then click “Add to Graph.” Adjust the dates to reflect the indicated range: from December 16, 2008, to the current date. For the second graph: Search for “federal funds rate target” and select “Federal Funds Target Range – Upper Limit,” “Federal Funds Rate – Lower Limit,” and “Effective Federal Funds Rate (daily),” and then click “Add to Graph.” From the “Edit Graph” panel, use the “Add Line” option to search for “Interest Rate on Excess Reserves” and then select “Add data series.” Adjust the dates to reflect the indicated range: from January 1, 2018, to the current date. For the third graph: Search for “federal funds rate target” and select “Federal Funds Target Range – Upper Limit,” “Federal Funds Rate – Lower Limit,” and “Effective Federal Funds Rate (daily),” and then click “Add to Graph.” Adjust to date to show the entire period: from December 16, 2008, to the current date. In each case, you can adjust the colors to your liking by using the color palette in the “Edit Graph” panel’s “Format” tab.

For more information on this topic, see “A New Frontier: Monetary Policy with Ample Reserves.”

Suggested by Scott Wolla.

View on FRED, series used in this post: DFEDTARL, DFEDTARU, DFF, IOER

Fixing the “Textbook Lag” with FRED (Part I)

Monetary policy in a world of ample reserves

Your economics textbook may still say the Federal Reserve uses open market operations to influence the federal funds rate. But in today’s economy, the Fed uses different policy tools.

Before September 2008, when reserves were scarce, the Federal Reserve bought and sold relatively small quantities of Treasury securities to adjust the level of bank reserves and influence the federal funds rate (FFR). But we now live in an environment of ample reserves. As such, the Federal Reserve can no longer effectively influence the FFR by making small changes in the supply of those reserves. Instead, the Fed uses its newer tools—paying interest on excess reserves (IOER) and the overnight reverse repurchase agreement (ON RRP) facility—to influence the FFR.

Since December 16, 2008, the FOMC has set a target range for the FFR, rather than a specific single target, and uses the rates on IOER and the ON RRP facility to keep the FFR rate in that target range. This process has ensured that the FFR has remained between the upper limit and the lower limit of the range.

The graph above tracks the actual FFR and the upper and lower limits of the range. Our next FRED Blog post provides more details. Stay tuned…

For more information on this topic, see “A New Frontier: Monetary Policy with Ample Reserves.”

How this graph was created: Search for “federal funds rate target”; select “Federal Funds Target Range – Upper Limit,” “Federal Funds Rate – Lower Limit,” and “Effective Federal Funds Rate (daily)”; and click “Add to Graph.” Adjust the date to show the entire period: December 16, 2008, to the current date. In each case, you can adjust the colors to your liking by using the color palette in the “Edit Graph” panel’s “Format” tab.

Suggested by Scott Wolla.

View on FRED, series used in this post: DFEDTARL, DFEDTARU, DFF


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