The History of Monetary Policy
Important Changes
1979 - 2020
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Instructional videos, links for the substitute teacher, or give links to students who missed
the information on the History of the Limited Reserves Framework, Ample Reserves
Framework, and the beginning of the Ample Reserve Regime, click on the links below:
Interactive Videos (1979 - 2025)
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Limited Reserves 1983 - 1993 Limited Reserves Framework, Phase 1
Limited Reserves 1979 - 2003 The Money Market vs. Limited Reserves
Limited Reserves 2003 - 2008 Limited Reserves Framework, Phase 2
1979 - 1983 The Money Market Graph (RIP)
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Timeline of Important Dates and Changes in U.S. Monetary Policy
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1993 M2 is no longer used as an leading economic indicator
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The Federal Reserve effectively stopped using M2 as a reliable, leading
economic indicator in 1993, following a public announcement by Chairman
Greenspan that the historical relationship between M2 and inflation had
broken down. This downgrade was due to a weak and unreliable link
between M2 growth and economic activity, particularly the GDP, and the
Fed now uses the federal funds rate to implement monetary policy.
NOTE: M1 and M2 is still taught inside an AP Macroeconomics course.
The Federal Reserve stopped the "monetarist experiment" of targeting
monetary aggregates (like the money supply) to control inflation and began
targeting the federal funds rate.
2003 - January 9 -- Discount Rate was replaced by the Primary Credit Rate
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The Discount Rate (DR) was discontinued in 2003 when the Federal
Reserve's primary credit (PCR) discount window program took effect on
January 9, 2003.
The discontinuation was part of a broader change in how the Federal
Reserve offers credit and was replaced them with two new programs:
1) Primary credit for depository institutions in generally sound financial
condition.
2) Secondary credit for institutions that do not qualify for primary credit.
This change was a restructuring of the lending facilities themselves,
aimed at making the discount window more effective by reducing the
stigma associated with borrowing, not eliminating the discount rate
mechanism entirely.
The name change occurred because the historical practice of "discounting"
a note has been replaced by advances (loans). As of January 2003, the
primary credit rate (PCR) is now the main rate for the Fed's discount
window lending, which acts as a key tool for implementing monetary policy.
NOTE: The Discount Rate (DR) is still used today in some financial
setting, but this term is correctly name the Primary Credit Rate (PCR).
AP Macroeconomics still uses the term Discount Rate.
2008 -- September - December Moving from a Limited Reserves Framework to an Ample Reserves Framework
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The Federal Reserve shifted from a "limited reserves" framework to an
"ample reserves" framework around the time of the 2008 financial crisis.
This change was a result of the Fed's large-scale asset purchases, which
flooded the banking system with reserves and made them no longer a
scarce resource.
This policy change was accelerated by the Emergency Economic
Stabilization Act of 2008, which advanced the effective date from the
original October 1, 2011, date set by the Financial Services Regulatory
Relief Act of 2006.
The Federal Reserve's ample reserves framework began in October 2008
when it started paying interest on both required reserves (IORR) and excess
reserves (IOER).
Prior to 2008, banks were required to hold reserves but were not paid
interest on them. This created a "tax" that distorted bank behavior and led
them to spend resources avoiding it. Paying interest on required reserves
(IORR) removed this distortion.
By paying interest on excess reserves (IOER), the Fed created a floor for
this rate, as banks had no incentive to lend reserves to other banks at a
lower rate than they could earn risk-free from the Fed.
While the shift to a new operating ample reserves framework was a
gradual transition, 2008 was the crucial starting point for the tools that
enable it.
2019 -- January - The Fed offically announcemented the Ample Reserves Regime
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In January 2019, the Federal Open Market Committee (FOMC) officially
announced it would operate in an Ample Reserves Regime, a policy
framework for implementing monetary policy using administered rates
like interest on reserve balances (IORB) to control short-term interest rates.
This system, also called a "floor system," means the Federal Reserve
maintains a large enough supply of reserves in the banking system to
achieve its interest rate target primarily by adjusting administered rates,
rather than by actively managing the supply of reserves to influence the
federal funds rate.
2020 -- March - The Fed reduced the Reserve Requirement Ratio to 0%
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The Fed reduced the reserve requirement ratio to 0% on March 26, 2020,
as part of its response to the economic impact of the COVID-19 pandemic.
This action eliminated reserve requirements for all depository institutions,
aiming to provide banks with more liquidity to lend.
The move was a response to the economic disruption caused by the
pandemic and was intended to encourage lending to businesses and
individuals. The Reserve Requirement Ratio has remained at 0%
since that time.
2021 -- July - The Fed replaces the IOER with the Interest on Reserve Balances (IORB)
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Starting on July 29, 2021, the separate rates for interest on required
reserves (IORR) and interest on excess reserves (IOER) were replaced
with a single rate called the interest on reserve balances (IORB).
This change was a result of setting all reserve requirement ratios to
0% in March 2020, which made the distinction between required and
excess reserves unnecessary.
The distinct IOER rate was discontinued on July 29, 2021, and replaced
by the single IORB rate. The interest was paid on all reserve balances,
not just those above a required amount.
This shift occurred because in March 2020, the Federal Reserve reduced
all reserve requirement ratios to 0%, effectively eliminating the need for a
separate rate for required reserves.
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2008 -- December - The Fed starts using Forward Guidance
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The Federal Reserve began using forward guidance in a significant way
after the 2008 financial crisis, with a key statement issued in December 2008.
While some forms of forward-looking language existed earlier, this is when
the Fed explicitly started to commit to keeping interest rates low for an
extended period to stimulate the economy.
2008 -- December - The Federal Funds Target Range -- Upper and Lower Limit
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The Federal Reserve started using a Federal Funds Target RANGE with an
upper and lower limit on December 16, 2008.
2020 -- March - The Primary Credit Rate (PCR) offically becomes the Upper Limit for the FFR
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The primary credit rate officially became the upper limit of the TARGET
RANGE for the federal funds rate in March 2020. This change, which
occurred as the COVID-19 pandemic put financial markets under stress,
meant the Primary Credit Rate was set at the top of the target range set
by the Federal Open Market Committee (FOMC). Previously, it was set
at a spread above the target rate.
2008 -- December - Federal Funds Target RANGE replaces to the Federal Funds Target RATE
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The Federal Funds Target RATE was discontinued in December 2008, when
the Federal Open Market Committee (FOMC) shifted to setting a target RANGE
-- Upper and Lower Limits for the Federal Funds Rate. This RANGE replaced the
single target RATE as the FOMC's a tool for implementing monetary policy.
2008 -- December - The Effective Federal Funds Rate is used rather than the single Federal Funds Target Rate
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After discontinuing the single Federal Funds TARGET rate, the Federal Reserve
began using a Federal Funds Range The Fed also shifted its policy to managing
the EFFECTIVE Federal Funds Rate (FFR) by setting a target range for the
EFFECTIVE Federal Funds Rate. This new system is used to influence a wider
range of borrowing costs and the old system of a single Federal Funds TARGET
rate was discontinued on FRED graphs in 2008.
NOTE: Almost all of the research above came from Microsoft Edge, Google AI.
2015 -- December - The Fed officially announces ending Zero Interest Rate Policy
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At its December 2015 meeting, the FOMC decided the economic conditions
and the economic outlook warranted taking the first step in the FOMC's
monetary policy's Normalization Principles and Plans which basically
stated the FOMC was trying to leave the Zero Interest Rate Policy (ZIRP)
behind and start normalize monetary policy by raising the FFR from 0.25%
(near zero) to 0.50% for the first time since December 2008.