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MONETARY POLICY DEVELOPMENT TRENDS IN THE US FEDERAL RESERVE
SYSTEM
A.B. Bass, Candidate of Economic Sciences, Associate Professor Financial University under the Government of the Russian Federation (Russia, Moscow)
DOI: 10.24411/2411-0450-2019-11288
Abstract. The article discusses the main stages and trends in the development of the monetary policy of the US Federal Reserve for the period from the 50s of the last century to the present. The methods and tools used by the Federal Reserve System in various periods of the American economy are analyzed. Particular attention is paid to the modification of the strategic and tactical goals of monetary policy. It is shown that in the conditions of the global financial crisis of 2008-2009 the classic monetary policy instruments previously used by Federal Reserve System did not give the desired result, as a result of which the Federal Reserve System developed a nonstandard solution - a program of quantitative easing - the purchase of financial assets, which was called LSAP (Large-scale Asset Purchase). It is concluded that, in general, the economic situation in the US economy in recent years has remained favorable largely due to the fact that the Federal Reserve System is quickly adjusting its policy and constantly revising its forecast for basic economic growth rates.
Keywords: US Federal Reserve System, monetary policy, inflation, interest rates, government securities, deposits, reserve standards, investments.
In the process of its development, the monetary policy of the central banks of different countries evolves evolutionally under the influence of a number of factors, both endogenous (behavior and dynamics of money market entities, the prevalence of preferences of individual market entities, etc.), and exogenous (features of economic cycles, the state of economic and political conjuncture, etc.).
Monetary policy of each country, along with common features, has its own specifics, due to national and institutional characteristics, the level of production, the size of the financial market, its structure and degree of development. An essential circumstance in the development and implementation of monetary policy is that it is an essential part of the macroeconomic policy of the state.
The US Federal Reserve System was created in 1913 and acts on the basis of the statutory mandate of the US Congress to "promote maximum employment, stabilize prices and maintain moderate long-term interest rates," so the Federal Reserve System monetary policy is based on meeting inflation targets and unemployment rates.
In the US economy, the Federal Reserve System activity is very significant, since this
agency is the regulator of the financial segment of the economy, which in recent decades has become one of the main in the US economy.
In addition, the importance of the US financial sector in the global financial system should be taken into account, Federal Reserve System regulation directly affects the determining processes in the global economy, influencing the dynamics and directions of capital flows, the state of the investment climate, the dynamics of the world stock market, the situation in financial and commodity markets.
The US Federal Reserve System (FRS) serves as the central bank, implementing measures to issue funds, control the financial sector and regulate macroeconomic processes. The Federal Reserve System consists of twelve regional reserve banks, is formally independent from the state body, has a shareholder ownership, and the main shareholders are banks - members of the Federal Reserve System (about 6,000 US commercial banks).
The Federal Reserve System acts as a lender of last resort, ensuring the elasticity of money supply, improving control over banking and improving the national payment sys-
tem. After the Second World War, the Federal Reserve System received many new powers allowing it to establish reserve requirements for non-bank depository institutions that open check accounts; control the activities of bank holding companies; to receive full information on the activities of credit organizations providing mortgage and consumer loans, etc.
But the main task of the Federal Reserve System was the implementation of a national monetary policy implemented by changing reserve requirements, applying the discount rate, as well as using open market operations that affect the money supply [1].
In order to stimulate economic growth while maintaining stable prices, the Federal Reserve System must ensure the balance of monetary and credit resources with the needs of the economy.
The Board of Governors, reserve banks and the Federal Committee for Open Market Operations (FOMC) achieve such a balance by affecting the levels of reserves of credit organizations, which, in turn, affect the ability of these organizations to issue loans or increase investments.
Open market operations are the most flexible and priority instrument of the monetary policy of the Federal Reserve System, which is the purchase or sale of government securities. These Federal Reserve System operations are carried out through the trading department of the Federal Reserve Bank of New York.
To increase the availability of cash and loans, the Federal Reserve System buys government securities. These purchases are paid by crediting reserve accounts with reserve banks opened by depository institutions. These large reserve accounts enable banks to receive more resources for lending and investing. In order to reduce the amount of money and credit flows, the Federal Reserve System, accordingly, sells securities, thereby limiting lending and investment activities.
In some cases, depository institutions borrow money from reserve banks to cover a temporary lack of liquidity. The discount rate for these short-term loans through the so-called "discount windows" is set by the boards of directors of reserve banks, subject
to approval by the Board of Governors. A change in the discount rate may restrain or stimulate banks' lending and investment operations, depending on the cost of resources. It should be noted that the change in the discount rate is an important indicator characterizing the monetary policy of the Federal Reserve System.
In accordance with certain norms established by the relevant law, the Board of Governors may change the percentage of deposits in depository institutions, which should be kept as reserves. The Federal Reserve System changes reserve requirements much less frequently than the discount rate, since such changes have far-reaching consequences for the entire economy.
In recent decades, the monetary policy of the Federal Reserve System has changed significantly several times. These changes were associated with the current economic situation, changes in the political course of the country and a number of other factors. Between 1941 and 1951, the Federal Reserve System, based on certain political goals, maintained interest rates on federal government securities, primarily on US Treasury securities at a fixed maximum level.
The monetary policy implemented by the Federal Reserve System at that time ensured the supply of funds. In addition, this monetary policy was focused on the fulfillment of two more goals: reducing payments from the budget for interest on federal government securities and the second, this program prevented speculative operations of various investors using interest rates. Support for interest rates on US treasury bonds at the highest possible fixed level was called the "Bond Support Program". It should be noted that such a monetary policy was valid for several years after the end of World War II.
However, in the period 1950-1951, since the outbreak of war in Korea, the bond support program faced a number of problems. The increase in business activity associated with military spending led to a significant increase in the demand for money, which had an effect on the increase in the interest rate. However, provided that there was a limit level of the interest rate standard, the Federal Reserve System was forced to respond to an
increase in money demand with a corresponding increase in money supply. There was an increase in loans and an increase in the amount of money in circulation.
In the US economy, inflation began to increase. The Federal Reserve System reaction was to increase the purchase of securities on the open market, but in this situation, the maintenance of the bond support program led to even greater inflation. To reduce the dynamics of inflationary processes, the Federal Reserve System has stopped bond support programs.
It is important to note that the end of the bond support program meant the Federal Reserve System submission of monetary policy to the goals of the US Treasury focused on financing the federal budget. This is an important moment in the evolution of US monetary policy, which has become an effective tool for a wide range of stabilization measures in the economy.
In the second half of the 50s, the Federal Reserve System, pursuing a monetary policy, continued to monitor market interest rates, but priority was given to supporting a certain level of free reserves, which are defined as the difference between the total amount of reserves and the amount of reserves obtained through loans from the Federal Reserve System.
In the sixties, during the recession of economic activity and a decrease in demand for monetary resources, the Federal Reserve System lowered the existing interest rates, which led to an increase in free reserves, and at the same time slowed down the growth rate of the amount of money in circulation. The Federal Reserve System actions aimed at increasing the level of free reserves were taken to accelerate these processes and were, in terms of content, a protectionist, monetary policy of "affordable money".
During the boom period, the growing demand for money increases the nominal interest rates, reducing the level of free reserves, and at the same time increases the volume of money in circulation, which leads to an increase in inflation. In response, the Federal Reserve System takes actions to reduce the level of free reserves and announces its readi-
ness to further reduce them as one of the areas of "tight" monetary policy.
But in the early seventies, the Federal Reserve System recognized the inefficiency of using the level of free reserves as a tactical goal of the current monetary policy, and the growth rate of the money supply in circulation began to become more important as a key variable. At the same time, in the short term, the Fed also controlled interest rates.
It should be emphasized that during these years a new strategic direction of monetary policy was formed, the content of which is the dual purpose of this policy. As the main goal, the Fed considered the limits of growth rates for various elements of the money supply, first of all, aggregates Ml and M2 per year. For example, in early 1978. The Federal Reserve System set growth ranges for MI (from 4 to 6.5%) and for M2 (from 6.5 to 9%) for the next fiscal year [2].
The second objective of this monetary policy was that, based on the estimated demand for money, the Federal Reserve System determined the level of the percentage rate of the federal reserve funds, which would correspond to the predicted increase in the amount of money in circulation. The level of the norm of the percentage of federal reserve funds defined in this way later served as a guideline for daily operations in the open market. In pursuit of the dual goal, the Federal Reserve System adjusted the interest rates of federal funds in response to changing demand for money.
It should be emphasized that, as practice has shown, the chosen policy focused on a double goal was not able to provide the necessary control over the growth of the money supply. This was due to the complexity of such forecasting of demand for money, as well as the lack of a quick reaction by the Federal Reserve System to changes in money supply. Along with this, in carrying out this variant of the monetary policy, the Federal Reserve System tried to avoid sharp changes in interest rates, which, according to the Federal Reserve System, can destabilize the situation in the financial markets and reduce the prospects for business activity.
In 1979-1982, the Federal Reserve System again changed its tactical goal, focusing on
the levels of independent reserves of the banking system. If the level of independent reserves grew faster than the Federal Reserve System determined, and this correlated with the goal of controlling the growth of the money supply, the Fed tightened its monetary policy, while not hindering the increase in interest rates of federal reserve funds to a certain level.
At the same time, if the level of independent reserves decreased or grew too slowly, the Federal Reserve System conducted operations on the open market, which improved the situation, leading to lower interest rates of the federal reserve funds.
The choice of the Federal Reserve System as a tactical goal to regulate the level of independent reserves, rather than the money supply in circulation, was mainly due to technical reasons, as at that time, the Federal Reserve System operated under conditions of a lack of required reserves (each bank - a member of the Fed should have these reserves), and this complicated the control over the amount of money in circulation.
In the 1980s, the US economy was subjected to a series of significant, one after the other, declines in economic activity. The previously implemented monetary policy contributed to a decrease in inflation, but the forecasted short-term destabilization of demand for money led to a new change in the tactical goals of monetary policy.
In 1982 The Federal Reserve System announced a new change in course, which included increased regulation of the monetary aggregates M2 and M3. It is important to note that along with this, the Federal Reserve System declared a quick and flexible response to all changes in the global and international financial and economic conditions, including changing the rules of government and banking control, affecting the speed of money circulation, the state of the economy as a whole, the conditions and parameters of the functioning of the world economy changes in international debt. Along with this, in its daily operations, the Federal Reserve System began to focus on reserves obtained through loans.
After the largest stock market crisis in 1987, the Board of Governors of the Federal Reserve System came to the conclusion that
regulation of the level of reserves obtained through a loan, considered as a tactical goal of monetary policy, leads to sharp fluctuations in interest rates on federal reserve funds. After that, the Federal Reserve System began to fix the norms of the percentage of federal reserve funds within the established range. Such actions cannot be considered as a complete return to the monetary policy of the seventies, since in its practice the Fed often uses the adjustment of short-term interest rates for federal funds depending on the development of the financial and economic situation.
In the following years, the monetary policy of the Federal Reserve System changed significantly, the policy was tightened, first of all, this was expressed in an increase in the base interest rate and the adoption of a number of non-standard methods, which can be considered the evolutionary development of the monetary policy of the Federal Reserve System. The use of these methods was due to the deterioration of the global and domestic financial and economic conditions.
There are three periods of monetary tightening of the US Federal Reserve from 1994 to 2006:
- 1994-1995 - during this period, the basic interest rate of the Fed increased by 300 basis points, up to 6%;
- 1999-2000 - The basic interest rate of the Federal Reserve System increased from 4.75% to 6.5%;
- 2004-2006 - in June 2004. The Federal Reserve System began a new cycle of monetary tightening, during which the base rate increased from 1% to 5.25%.
The US mortgage crisis in 2008 turned into a global financial crisis, which had a dramatic negative impact on the financial and credit system of the United States and other countries. In these years, the global economy has faced the most serious crisis since the Great Depression, which not only caused a significant reduction in production in most economies, but also showed that the methods and instruments of monetary policy used previously in the practice of the Central Banks are not enough effective.
At the beginning of the global financial crisis, the federal reserve system first took a number of standard actions, including lower-
ing the federal funds rate from 5% to 0.25% -almost to the lowest possible level. But in the conditions of the global financial crisis, the classic monetary policy instruments previously used by the Fed did not give the desired result, as a result of which the Federal Reserve System developed a non-standard solution - a quantitative easing program, called the LSAP (Large-scale Asset Purchase).
Large-scale purchases of financial assets (LSAP) have become the main instrument of unconventional monetary policy implemented by the US Federal Reserve. Another monetary tool of the US Federal Reserve was the program for extending the payment of government securities (Treasury maturity extension program, MEP). The LSAPl (QEl) program lasted 17 months, since November 2008. until March 2010, and was aimed at buying US mortgage bonds and government securities to support the real estate market and major financial institutions after the bankruptcy of Lehman Brothers.
During the first quantitative easing, the US Federal Reserve spent $ 1250 billion. US to purchase mortgage bonds of state agencies, in the amount of 172 billion dollars. US for the purchase of debts of mortgage government agencies of the United States and 300 billion. US to purchase long-term US government securities. [3].
The second program of quantitative easing LSAP2 (QE2) lasted eight months, since November 2010. until June 2011, and during this time, the Fed acquired long-term US government securities worth 600 billion dollars. USA. In September 2011 the MEP program began, which lasted 15 months, until December 2012. During this program, the US Federal Reserve acquired long-term Treasury bonds worth $ 667 billion. The USA and at the same time sold short-term treasury bonds for the same amount. Reducing the payment terms of US treasury bonds owned by financial institutions increased their financial stability and the stability of the banking sector as a whole.
The third LSAP3 quantitative easing program (QE3) began in September 2012, and by October 2014. US Federal Reserve Acquires $ 823 Billion in Government Mortgage Bonds US and treasury securities in the amount of 790 billion dollars. USA. The US Federal Re-
serve monthly acquired $ 40 billion. US mortgage bonds and $ 45 billion. USA - US long-term treasury bills.
It should be noted that these programs functioned at very low interest rates. Quantitative easing programs have been in place in the United States for 6 years, from 2008 to 2014. As part of these programs, the Fed provided the US economy with significant funds
- about four trillion dollars.
For seven years after the global financial crisis, the Federal Reserve System kept the base rate near zero to help restore the US economy. As the economic situation improved, the Federal Reserve System began to change its policy, raising rates once in 2015 and 2016.
In 2017, the Federal Reserve System switched to a quarterly rate increase. As a result, the current target range of rates reached 2.0-2.25%, approaching levels that, according to most Fed leaders, are more consistent with a stable economy.
The following year, the Federal Reserve System announced a return to asset purchases, i.e. will again begin to increase its balance through the purchase of government securities
- such an increase was discontinued in 2014. The purpose of the purchase of securities, as announced by the Federal Reserve System, was to prevent a shortage of liquidity in the money markets.
Although in form it resembles the operations of quantitative easing (QE), which the Federal Reserve System has already carried out three times between 2008 and 2014. Fed Chairman Powell emphasized that in this case we are not talking about "large-scale asset purchase programs" deployed after the global financial crisis and new purchases will not lead to a significant change in the current monetary policy [4].
Federal Reserve System assets at the beginning of 2019 are $ 3.9 trillion - these are mainly debt securities on its balance sheet. Liabilities correspond to them - mainly dollars in cash (by almost $ 1.8 trillion) and bank deposits with the Federal Reserve System or reserves (by $ 1.5 trillion). At the beginning of 2019, the volume of paper money and coins exceeded the reserves of banks in the accounts of the Fed for the first time since
2010. This happened because bank reserves have almost doubled since 2014, from $ 2.8 trillion up to less than $ 1.5 trillion at the end of September.
It was announced that the new Federal Reserve System measures are more technical in nature and focused on the smooth functioning of money markets, rather than stimulating an economy that is in good shape - according to the Fed, "the labor market and the inflation picture are favorable at present." At the same time, the Fed monitors "geopolitical risks", trade frictions and Brexit in the UK. In the United States, meanwhile, there are signs of a future economic slowdown: a slowdown in employment growth, a decrease in production activity [5].
In 2018, the Federal Reserve System raised the base interest rate four times - from March 21, it was raised to 1.75%, from June 3 to 2%, from September 26 to 2.25%, December 19 to 2.50 p. by raising the interest rate, the Federal Reserve System proceeded from that inflation will be strengthened amid falling unemployment. The Federal Reserve System began the general cycle of tightening monetary policy in 2015 after a seven-year hiatus, during which time the rate increased eight times and always in increments of 0.25 percentage points, raised the rate four times, based on the fact that inflation will strengthen amid falling unemployment .
In 2019 The federal reserve system pursued a policy to reduce the interest rate three times in a row; it reduced the base interest rate by 25 bp - from 1.75-2 to 1.5-1.75%, follows from the published materials of the department - the last decrease occurred on October 30, 2019. Prior to this, the Federal Reserve lowered the rate in July and September, both times by 25 bp. The July decline was the first since the global financial crisis, and Fed Chairman Jerome Powell said this was not the beginning of a monetary easing cycle.
From October 15, 2019 The Fed also again
bonds each month to provide the banking system with sufficient reserves. Purchases will last at least until the second quarter of 2020. However, Powell said that we are not talking about quantitative easing (QE), which the Fed resorted to three times between 2008 and 2014. In those few QE rounds, the regulator's total balance sheet increased from about $ 900 million to $ 4.5 trillion.
The reason for the slowdown in the rate hike lies in the expectation of a slowdown in the US economy, which will negatively affect the global growth of the entire world economy, they emphasize.The US Federal Reserve System (Federal Reserve) on Wednesday will announce the last decision on the base interest rate this year. But the main intrigue will not be in its very likely increase, but in the plans of the American regulator at the rate in 2019. It can grow less than the Federal Reserve System had planned recently, and this could theoretically weaken the dollar.
According to Jerome Powell, Chairman of the Federal Reserve System, the Central Bank lowered its key interest rate this year, partly on the basis that the economy is not as strong as it was believed during the rate hike last year. In October 2019, representatives of the Federal Reserve System reported that the agency would pause in the cycle of lowering the rate. Executives have repeatedly said that the slowdown in company investment and global growth amid a trade war between the US and China justified these declines.
Thus, it should be emphasized that in general the economic situation in the US economy in 2019. It remained favorable largely due to the fact that the Federal Reserve System quickly adjusts its policy, constantly revises its forecast for basic economic growth rates, including the ability of the labor market to provide workers with jobs without creating excessive inflation, as well as a short-term interest rate that does not stimulate, but also does not slows down growth - this rate is neutral.
began to buy $ 60 billion worth of treasury
References
1. Kidwell D., Petersen R., Blackwell D. Financial institutions, markets and money. from English N. Gabenov, V. Kuzin. - St. Petersburg: Publishing House "Peter", 2000. - P. 152-153.
2. Dolan E.J. et al. Money, banking and monetary policy / Per. from English V. Lukashevich and others; Under the total. ed. V. Lukashevich.- M., 1996. - 448 p.
3. Macroeconomic regulation: tasks and development prospects // Under. ed. D.E. Sorokina, S.V. Shmaneva, I.L. Yurzinova. - M.: KNORUS, 2018. - 153 p.
4. Official site Board of Governors of the Federal Reserve System. - [Electronic resource]. -Access mode: http://www.federalreserve.gov/boarddocs/press/monetary/.
5. Official site Board of Governors of the Federal Reserve System. - [Electronic resource]. -Access mode: http://www.federalreserve.gov/.
ТЕНДЕНЦИИ РАЗВИТИЯ ДЕНЕЖНО-КРЕДИТНОЙ ПОЛИТИКИ ФЕДЕРАЛЬНОЙ РЕЗЕРВНОЙ СИСТЕМЫ США
А.Б. Басс, канд. экон. наук, доцент Финансовый университет при Правительстве РФ (Россия, г. Москва)
Аннотация. В статье рассматриваются основные этапы и тенденции развития денежно-кредитной политики Федеральной резервной системы США за период с 50-х годов прошлого века по настоящее время. Анализируются методы и инструменты, применяемые ФРС в различные периоды американской экономики. Особое внимание уделено модификации стратегических и тактических целей денежно-кредитной политики. Показано, что в условиях мирового финансового кризиса 2008-2009 гг. классические инструменты денежно-кредитной политики, ранее используемые ФРС, не дали необходимого результата, вследствие этого ФРС разработала нестандартное решение - программу количественного смягчения - покупки финансовых активов, которая получила название LSAP (Large-scale Asset Purchase). Делается вывод, что в целом экономическое положение в экономике США в последние годы оставалось благоприятным во многом благодаря тому, что ФРС быстро корректирует свою политику, постоянно пересматривает своей прогноз в отношении базовых темпов роста экономики.
Ключевые слова: Федеральная резервная система США, денежно- кредитная политика, инфляция, процентные ставки, государственные ценные бумаги, депозиты, нормы резервирования, инвестиции.
