| FOMC Statement and Board of Governors Press Release December 17 and 18, 2024 |
| Maximum Employment (February 16, 2025): |
NOTE: The Federal Reserve (Fed) officially adopted a 2% target inflation
rate in January 2012 when Chairman Ben Bernanke announced it as an
explicit policy target, marking a significant shift in the Fed's monetary
policy strategy; prior to this, the Fed did not have a formally stated
inflation target but often aimed for a range around 2%.
rate in January 2012 when Chairman Ben Bernanke announced it as an
explicit policy target, marking a significant shift in the Fed's monetary
policy strategy; prior to this, the Fed did not have a formally stated
inflation target but often aimed for a range around 2%.
| Stable Prices (December 2024): |
The Natural Rate of Unemployment, now called the Noncyclical Rate of
Unemployment, stands at 4.1%.
Unemployment, stands at 4.1%.
The annual inflation rate for the Personal Consumption Expenditures (PCE) index
in December 2024 is 2.6%
in December 2024 is 2.6%
| IMPORTANT: The Federal Reserve's Federal Open Market Committee (FOMC) is bound by the Dual Mandate to promote maximum employment and stable prices. |
| FYI: Touch the lines on the graphs below and read this section if you want to be enlightened on terms in Monetary Policy that have been Discontinued. |
The Discount Rate was used in monetary policy from 1935 - 2002.
In January 2003, the FOMC changed the name to the Primary
Credit Rate.
The Meeting Statements and Board of Governors
Implementation Notes you will be seeing today never mention
the term Discount Rate, but has administered the Primary Credit
Rate by setting it at 0.10% or 10 basis points above the Interest
on Reserve Balances (IORB) since January 20, 2020.
The spread between the upper and lower limits has been a
mere .25% or 25 basis points since March 2020.
Also, the DR = PCR has been equal to the Upper Limit of the
Target Federal Funds Rate since March 2020.
In January 2019, the Federal Reserve (Fed) adopted an "ample
reserves regime" to guide its monetary policy. This means that
the Fed aims to maintain a large enough supply of reserves to
control short-term interest rates.
In January 2003, the FOMC changed the name to the Primary
Credit Rate.
The Meeting Statements and Board of Governors
Implementation Notes you will be seeing today never mention
the term Discount Rate, but has administered the Primary Credit
Rate by setting it at 0.10% or 10 basis points above the Interest
on Reserve Balances (IORB) since January 20, 2020.
The spread between the upper and lower limits has been a
mere .25% or 25 basis points since March 2020.
Also, the DR = PCR has been equal to the Upper Limit of the
Target Federal Funds Rate since March 2020.
In January 2019, the Federal Reserve (Fed) adopted an "ample
reserves regime" to guide its monetary policy. This means that
the Fed aims to maintain a large enough supply of reserves to
control short-term interest rates.
The "Effective Federal Funds Rate" is the actual interest rate at
which banks lend money to each other overnight, while the
"Target Federal Funds Rate" is the rate that the Federal Reserve
sets as a goal for the effective rate to reach, meaning the effective
rate can fluctuate slightly around the target set by the Fed;
essentially, the target is what the Fed wants the rate to be, and
the effective rate is what it actually is in the market.
Key points about the difference:
Who sets it:
The Federal Open Market Committee (FOMC) sets the Target
Federal Funds Rate, while the market determines the Effective
Federal Funds rate based on actual transactions between banks.
How it's calculated:
The Effective Federal Funds Rate is calculated as a weighted
average of all overnight lending rates between banks, while the
Target Federal Funds Rate is a single, predetermined value set
by the Fed.
Impact of the Fed:
The Fed uses tools like open market operations to try and
influence the Effective Federal Funds Rate to align with the
Target Federal Funds Rate.
which banks lend money to each other overnight, while the
"Target Federal Funds Rate" is the rate that the Federal Reserve
sets as a goal for the effective rate to reach, meaning the effective
rate can fluctuate slightly around the target set by the Fed;
essentially, the target is what the Fed wants the rate to be, and
the effective rate is what it actually is in the market.
Key points about the difference:
Who sets it:
The Federal Open Market Committee (FOMC) sets the Target
Federal Funds Rate, while the market determines the Effective
Federal Funds rate based on actual transactions between banks.
How it's calculated:
The Effective Federal Funds Rate is calculated as a weighted
average of all overnight lending rates between banks, while the
Target Federal Funds Rate is a single, predetermined value set
by the Fed.
Impact of the Fed:
The Fed uses tools like open market operations to try and
influence the Effective Federal Funds Rate to align with the
Target Federal Funds Rate.
The term Discount Rate was replaced by the
term Primary Credit Rate. This rate is an
Administered Rate.
(January 2003)
term Primary Credit Rate. This rate is an
Administered Rate.
(January 2003)
The terms Interest paid on Excess Reserves (IOER)
and Interest paid on Required Reserves (IORR)
were replaced with a single term entitled
Interest paid on Reserve Balances (IORB).
This is the #1 Key Administered Rate Tool of
Monetary Policy.
(November 2021)
and Interest paid on Required Reserves (IORR)
were replaced with a single term entitled
Interest paid on Reserve Balances (IORB).
This is the #1 Key Administered Rate Tool of
Monetary Policy.
(November 2021)
The term Federal Funds Target Rate was replaced
by the term Effective Federal Funds Rate (FFR).
This is a Policy Rate.
(July 2008)
by the term Effective Federal Funds Rate (FFR).
This is a Policy Rate.
(July 2008)
The Federal Reserve Bank of New York's Trading Desk uses
open market operations to keep reserves ample. This involves
buying and selling securities to shift the supply of reserves.
The Fed sets a target range for the federal funds rate (FFR)
and uses administered rates (i.e., Interest on Reserve Balances
(IORB), Primary Credit Rate) to keep the Federal Funds Rate
(FFR) within that range.
How the Desk keeps reserves ample:
Purchases securities:
The Desk buys securities to increase the supply of reserves.
Monitors reserve demand:
The Desk monitors reserve demand and conditions to understand
how to adjust reserve levels.
Uses administered rates: The Desk uses administered rates, like
the IORB rate, to control interest rates.
open market operations to keep reserves ample. This involves
buying and selling securities to shift the supply of reserves.
The Fed sets a target range for the federal funds rate (FFR)
and uses administered rates (i.e., Interest on Reserve Balances
(IORB), Primary Credit Rate) to keep the Federal Funds Rate
(FFR) within that range.
How the Desk keeps reserves ample:
Purchases securities:
The Desk buys securities to increase the supply of reserves.
Monitors reserve demand:
The Desk monitors reserve demand and conditions to understand
how to adjust reserve levels.
Uses administered rates: The Desk uses administered rates, like
the IORB rate, to control interest rates.
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Here is a Dual Mandate Dart Board lesson if you are interested:
https://reffonomics.com/DualMandateBullseyeReffVersion2024.html
https://reffonomics.com/DualMandateBullseyeReffVersion2024.html
| Teaching Ample Reserves Regime Using the |
| Notes in this section come from Microsoft Edge, Google AI Overview |
Reff with Ben Bernanke (far right) (2007)
A special thank you goes out to Scott Wolla, Economic Education Officer at Federal Reserve Bank of St. Louis, and Jane Ihrig,
Senior Advisor for the Federal Reserve Board for their 2019 and 2020 work on teaching about the Ample Reserves Regime.
A New Frontier: Monetary Policy with Ample Reserves (2019):
https://www.stlouisfed.org/publications/page-one-economics/2019/05/03/a-new-frontier-monetary-policy-with-ample-reserves
Let’s close the gap: Revising teaching materials to reflect how the Federal Reserve implements monetary policy (2020):
https://www.federalreserve.gov/econres/feds/files/2020092pap.pdf
Senior Advisor for the Federal Reserve Board for their 2019 and 2020 work on teaching about the Ample Reserves Regime.
A New Frontier: Monetary Policy with Ample Reserves (2019):
https://www.stlouisfed.org/publications/page-one-economics/2019/05/03/a-new-frontier-monetary-policy-with-ample-reserves
Let’s close the gap: Revising teaching materials to reflect how the Federal Reserve implements monetary policy (2020):
https://www.federalreserve.gov/econres/feds/files/2020092pap.pdf
