1. Primary Monetary Policy Tools Jill Student Jack Deskoccupier Dan Intheclouds Joanie Willgraduatesoon Austrian Economics May Term 2015 Professor Hal Snarr Westminster College

2. Q DRDR 0 SRSR i ff Interest on reserves – In 10/08, the Fed began paying interest on reserves (i or ) Federal Funds Market 1.5 0.5 Primary Monetary Policy Tools

3. Q 0.5 DRDR -0.9 0 SRSR i ff Crisis mode 0.5 Interest on reserves – In 10/08, the Fed began paying interest on reserves (i or ) – After the Fed purchased of trillions of dollars in securities, reserves supply increased – The federal funds rate may have went negative. – Setting interest on reserves put a price floor on the federal funds rate Federal Funds Market 1.5 Primary Monetary Policy Tools

4. Q DRDR SRSR i ff Federal Funds Market Interest on reserves – In 10/08, the Fed began paying interest on reserves (i or ) – After the Fed purchased of trillions of dollars in securities, reserves supply increased – The federal funds rate may have went negative. – Crisis mode allows the Fed to buy or sell as many securities as it wants without changing the federal funds rate. 0 1.5 0.5 Primary Monetary Policy Tools

5. Q DRDR SRSR i ff Federal Funds Market Interest on reserves – In 10/08, the Fed began paying interest on reserves (i or ) – After the Fed purchased of trillions of dollars in securities, reserves supply increased – The federal funds rate may have went negative. – Crisis mode allows the Fed to buy or sell as many securities as it wants without changing the federal funds rate. 0 1.5 0.5 Primary Monetary Policy Tools

6. Q DRDR SRSR i ff Federal Funds Market Interest on reserves – In 10/08, the Fed began paying interest on reserves (i or ) – After the Fed purchased of trillions of dollars in securities, reserves supply increased – The federal funds rate may have went negative. – Crisis mode allows the Fed to buy or sell as many securities as it wants without changing the federal funds rate. 0 1.5 0.5 Primary Monetary Policy Tools

7. Q DRDR SRSR i ff Federal Funds Market Interest on reserves – In 10/08, the Fed began paying interest on reserves (i or ) – After the Fed purchased of trillions of dollars in securities, reserves supply increased – The federal funds rate may have went negative. – Crisis mode allows the Fed to buy or sell as many securities as it wants without changing the federal funds rate. 0 1.5 0.5 Primary Monetary Policy Tools

8. i ff Federal Funds Market Interest on reserves Q DRDR SRSR – In 10/08, the Fed began paying interest on reserves (i or ) – After the Fed purchased of trillions of dollars in securities, reserves supply increased – The federal funds rate may have went negative. – Crisis mode allows the Fed to buy or sell as many securities as it wants without changing the federal funds rate. 0 1.5 0.5 Primary Monetary Policy Tools

9. i ff Federal Funds Market Q DRDR SRSR – The Fed raises the federal funds rate by announcing a hike in i or and i d Interest on reserves 1.5 0.5 0 2.75 1.75 Primary Monetary Policy Tools

10. 3 4 SRSR Federal Funds Market – The Fed lowers the federal funds rate by announcing reductions in i or and i d – To go back to normal mode, the Fed will allow reserves demand to rise (via economic growth), conduct several controlled OMSs, and adjust i or higher and higher, while it monitors inflation – The Fed raises the federal funds rate by announcing a hike in i or and i d Interest on reserves 1.5 0.5 i ff Q 0 Primary Monetary Policy Tools