Progress toward price stability: a report card for 1994

The Federal Reserve tightened monetary policy six times in 1994. The purpose of these policy moves was to encourage sustainable, noninflationary economic growth. Early actions were taken to move monetary policy toward a less accommodative stance than was followed in 1993. Later actions were taken "against the backdrop of continuing strength in the economic expansion and high levels of resource utilization." These later actions were intended "to keep inflationary pressures contained, and thereby foster sustainable economic growth." All of the actions were in keeping with the Federal Reserve's long-run goal of price stability, which is the key contribution the Federal Reserve can make toward maximizing long-run growth and living standards in the United States.> Kahn examines the behavior of inflation in 1994 in relation to the Federal Reserve's goal of achieving price stability over time. The article is the second in an annual series assessing the Federal Reserve's progress toward achieving price stability.Inflation (Finance) ; Prices

Achieving price stability: a summary of the Bank's 1996 symposium

Central banks throughout the world are moving to adopt long-run price stability as their primary goal. Whether operating with multiple short-run goals or legislative mandates for price stability, virtually all central banks have recognized the desirability of achieving price stability over time. Countries with moderate to high inflation are adopting policies to reduce inflation, and countries with low inflation are adopting policies to achieve and maintain price stability.> To better understand how central banks can best reduce inflation and what policies and operating procedures should be implemented to maintain price stability, the Federal Reserve Bank of Kansas City sponsored a symposium entitled Achieving Price Stability, held at Jackson Hole, Wyoming, on August 29-31, 1996. The symposium brought together a distinguished group of central bankers, academics, and financial market representatives.> Kahn summarizes the papers and commentary presented at the symposium. Participants agreed that low or zero inflation is the appropriate long-run goal for monetary policy. They disagreed, however, about whether a little inflation should be tolerated and what strategies should be adopted to achieve and maintain price stability.Banks and banking, Central ; Prices

The Greenspan era : lessons for the future : a summary of the Bank's 2005 Economic Symposium

During Alan Greenspan’s years at the helm of the Federal Reserve System, the global economy has undergone significant structural change and withstood a variety of financial and economic shocks. In addition to helping steer the global economy through such challenges, Chairman Greenspan has been at the center of discussions on monetary policy ideas and issues. To honor Alan Greenspan’s service, the Federal Reserve Bank of Kansas City sponsored an economic symposium to explore several of these ideas and issues that will continue to challenge central bankers for years to come. The symposium was held at Jackson Hole, Wyoming, August 25-27. Kahn highlights the principal issues raised at the symposium, which brought together a distinguished group of central bank officials and academic, policy, and business economists to discuss these important challenges and identify lessons for the future.Greenspan, Alan ; Monetary policy ; Banks and banking, Central

Communicating a policy path: the next frontier in central bank transparency?

In the last two decades, central banks have taken a variety of steps to increase the transparency of monetary policy. Today, many economists are suggesting ways to further increase transparency. One area of considerable interest is the outlook for the future path of the policy rate. The policy rate is the short-term, typically overnight, interest rate that central bankers use to adjust the stance of monetary policy. While central banks typically announce changes in the policy rate when they occur, very few central banks provide an explicit description of where the policy rate is likely to be set in the future. ; Yet, this information is clearly of value to financial markets. Financial market participants want to know the policy path so they can properly price long-term assets, such as government notes and bonds, which depend in part on future short rates. In addition, speculation about the outlook for the policy rate is a staple of the financial press, and futures markets have developed to allow investors to hedge risk or speculate about future policy moves. More information about the policy path might make these markets more efficient and reduce asset price volatility. ; Kahn surveys current central bank practices relating to transparency and the future path of the policy rate. He identifies some of the conceptual and practical issues that may limit central banks' ability and willingness to provide more information about the policy path to financial markets.Banks and banking, Central

Achieving price stability: a 1993 report card

The primary goal of Federal Reserve monetary policy is to foster maximum sustainable growth in the U.S. economy by achieving price stability over time. Although considerable progress toward price stability has been made since the early 1980s, inflation remains above the level most analysts would associate with price stability. Because price stability is the key contribution the Federal Reserve can make toward maximizing long-run growth and living standards in the United States, it is important for the Federal Reserve to remain vigilant in its efforts to keep inflation in check.> Kahn examines the behavior of inflation over the past year in relation to the Federal Reserve's goal of achieving price stability over time. First, he discusses why price stability is important and how the Federal Reserve has made significant progress toward price stability since the early 1980s. Second, he describes the behavior of inflation in 1993, showing that inflation declined for the year as a whole. Third, he shows that inflation expectations also declined in 1993, suggesting the public believes the inflation outlook has improved. Together, these findings suggest the Federal Reserve made progress in 1993 toward achieving price stability.Prices ; Inflation (Finance) ; Monetary policy - United States

Global economic integration : opportunities and challenges : a summary of the Bank's 2000 Symposium

The increasingly integrated global economy presents policymakers with both opportunities and challenges. Global economic integration is widely thought to improve the allocation of resources, promote technology transfer, and enhance living standards. But, at the same time, economic integration has frequently been blamed for growing trade imbalances, increased financial market volatility, and less effective domestic macroeconomic policies.> To better understand how policymakers can maximize the benefits from globalization while recognizing the challenges, the Federal Reserve Bank of Kansas City sponsored a symposium entitled, "Global Economic Integration: Opportunities and Challenges," held at Jackson Hole, Wyoming, on August 24-26, 2000. The symposium brought together a distinguished group of central bankers, academics, and financial market experts.> Kahn highlights the principal issues raised at the symposium and summarizes the papers presented and the commentary. Symposium participants agreed that globalization has produced net economic benefits for national economies, and they outlined a variety of approaches for addressing the associated challenges.Financial markets ; Monetary policy

Taylor rule deviations and financial imbalances

Over the last quarter century, the U.S. economy has faced a number of financial shocks originating in a variety of sectors and locations around the globe. While most of these crises have had little or no effect on the United States, the recent financial crisis caused the worst U.S. recession since the Great Depression. ; The causes of these crises are varied. To some extent, however, a buildup of financial imbalances preceded each crisis. In some cases, asset prices rose to unsustainable levels inconsistent with market fundamentals. In other cases, a buildup of foreign debt precipitated a currency crisis. A key question for policymakers is whether policy actions taken in the period leading up to the crisis leaned against, or contributed to, the building imbalances. ; Kahn explores whether policy actions taken in the period leading up to the recent financial crisis inadvertently exacerbated financial imbalances by keeping policy-controlled interest rates too low for too long. He uses deviations from Taylor rules as indicators of interest rates being held too low and considers a number of indicators of financial imbalances. While there appears to be a statistically significant relationship between Taylor rule deviations and a number of financial indicators, their economic significance is mixed.

Monetary policy under a corridor operating framework

The Federal Reserve aggressively eased monetary policy during the 2008-09 global financial crisis. The Federal Open Market Committee (FOMC) cut the federal funds rate target to near zero, and the Board of Governors introduced a number of novel liquidity facilities. In addition, the FOMC purchased long-term Treasuries and agency mortgage-backed securities on a large scale. These actions caused the Fed’s balance sheet to balloon. ; As the balance sheet grew to unprecedented size, the Open Market Desk at the New York Fed found it increasingly difficult to achieve FOMC’s target funds rate. In response, in October 2008, as authorized under the Financial Services Regulatory Act of 2006 and the Emergency Economic Stabilization Act of 2008, the Federal Reserve began paying interest on excess reserves. This interest rate expected to establish a floor under the federal funds rate. The discount rate—which since January 2003 has been set as a penalty rate the funds rate target—was expected to limit upward pressure on the funds rate ; With these moves, the Federal Reserve’s operating framework now incorporates the essential elements of a “channel” or “corridor” system. In such a system, the target for the federal funds rate would typically be set within the corridor established by the discount rate at the ceiling and interest rate on excess reserves at the floor. Although the Federal Reserve has not formally adopted a channel system, establishing a under the federal funds rate target will be especially important as the Federal Reserve begins to exit its highly accommodative policy stance. ; Kahn examines how a corridor system works in theory and practice. While such a framework may offer a number of advantages as an operating system, it may also create new challenges. The key advantages are that it could help the Federal Reserve achieve its target for the federal funds rate while allowing the balance sheet to act as an independent tool of policy. A key question is whether the discount rate will be an effective ceiling and the interest rate on excess reserves an effective floor. In addition, how changes in the funds rate target, the discount rate and the rate on excess reserves will be sequenced is unclear. In particular, the roles of the FOMC, Board of Governors, and Reserve Bank Boards of Directors in such a system may need to be clarified.

Monetary policy under a corridor operating framework

The Federal Reserve aggressively eased monetary policy during the 2008-09 global financial crisis. The Federal Open Market Committee (FOMC) cut the federal funds rate target to near zero, and the Board of Governors introduced a number of novel liquidity facilities. In addition, the FOMC purchased long-term Treasuries and agency mortgage-backed securities on a large scale. These actions caused the Fed’s balance sheet to balloon. ; As the balance sheet grew to unprecedented size, the Open Market Desk at the New York Fed found it increasingly difficult to achieve FOMC’s target funds rate. In response, in October 2008, as authorized under the Financial Services Regulatory Act of 2006 and the Emergency Economic Stabilization Act of 2008, the Federal Reserve began paying interest on excess reserves. This interest rate expected to establish a floor under the federal funds rate. The discount rate—which since January 2003 has been set as a penalty rate the funds rate target—was expected to limit upward pressure on the funds rate ; With these moves, the Federal Reserve’s operating framework now incorporates the essential elements of a “channel” or “corridor” system. In such a system, the target for the federal funds rate would typically be set within the corridor established by the discount rate at the ceiling and interest rate on excess reserves at the floor. Although the Federal Reserve has not formally adopted a channel system, establishing a under the federal funds rate target will be especially important as the Federal Reserve begins to exit its highly accommodative policy stance. ; Kahn examines how a corridor system works in theory and practice. While such a framework may offer a number of advantages as an operating system, it may also create new challenges. The key advantages are that it could help the Federal Reserve achieve its target for the federal funds rate while allowing the balance sheet to act as an independent tool of policy. A key question is whether the discount rate will be an effective ceiling and the interest rate on excess reserves an effective floor. In addition, how changes in the funds rate target, the discount rate and the rate on excess reserves will be sequenced is unclear. In particular, the roles of the FOMC, Board of Governors, and Reserve Bank Boards of Directors in such a system may need to be clarified.

Nominal GNP: an anchor for monetary policy?

Nominal GNP has some theoretical appeal as a guide for monetary policy. Its principal strength is that it would prevent policy from drifting away from the long-run goal of price stability. However, whether policymakers can translate this theoretical appeal into an actual policy that improves economic performance is an open question.Gross national product ; Monetary policy