| Joel Miller FEE.org Curriculum Development Officer Taught AP® Economics at Forsyth County Schools, Georgia for 14 years John Morton Award for Excellence in Economic Instruction, 2020 AP® Economics Reader |
| FEE.org Presents |
| Fireside Chat Ample Reserves Regime |
| Steven M. Reff Economics Lecturer University of Arizona (2007 - 2016) AP® Economics Test Development Committee Member AP® Reader and Table Leader |
| Matt Pedlow Chelsea High School, Michigan Economics Educator for 16 years. John Morton Award for Excellence in Economic Instruction, 2018 AP® Daily Video Instructor, Reader, and Table Leader |
Instructors
| (Foundation for Economics Education) |
| The Continuation of the Ample Reserves Regime (2019) (10 minutes) |
| "Saving You Time by Teaching Online." |
| Current Event Using the Ample Reserves Regime Graph |
Reff:
Agenda for the History of Ample Reserves:
*Dual Mandate and the FED Bullseye Interactive Graph (5 minutes)
*History of the Ample Reserves Regime (25 minutes)
*Joel and Matt will help within this discussion.
*Reff: Other Curriculum Resources on Ample Reserves Regime (3 min.)
*Joel: Wrap Up (1 minute)
*Dual Mandate and the FED Bullseye Interactive Graph (5 minutes)
*History of the Ample Reserves Regime (25 minutes)
*Joel and Matt will help within this discussion.
*Reff: Other Curriculum Resources on Ample Reserves Regime (3 min.)
*Joel: Wrap Up (1 minute)
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Link to: fee.org/learning-center
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| Joel Miller Closing Remarks |
| Expansionary Monetary Policy in an Ample Reserves Regime (5 minutes) |
| The Target Federal Funds Rate is DISCONTINUED |
| The "Discount Rate" is DISCONTINUED and replaced by the "Primary Credit Rate" |
| 2003 (January) |
| 2008 (December) |
| The Beginning of the Upper and Lower Target Range or Bound determined at the FOMC meetings. |
| The Effective Federal Funds Rate (the Policy Rate) determined by the FOMC lies in between the Upper and Lower Range or Bounds set by the FOMC. |
| On October 6, 2008, the Federal Reserve Board announced plans to begin paying interest on required and excess reserves at rates 10 and 75 basis points, respectively, below the Federal Open Market Committee’s federal funds rate target. |
| Interest Rate on Reserve Balances (IORB). The Interest on Excess Reserves (IOER) and the Interest on Required Reserves (IORR) are replaced with a single rate, Interest on Reserve Balances (IORB or IOR). |
| During normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances. |
| Essentially, paying interest on reserves allows the FRB to place a floor on the federal funds rate, since depository institutions have little incentive to lend in the overnight interbank federal funds market at rates below the interest rate on excess reserves. |
The Fed’s October 6, 2008 press release (Federal
Reserve Board 2008) offered a mixed rationale for
the announced change in regime. Tolley and
Friedman’s efficiency arguments survived,
explaining the higher interest rate on required
reserves, which according to the press release
would “essentially eliminate the opportunity cost
of holding required reserves, promoting efficiency
in the banking sector.”
Reserve Board 2008) offered a mixed rationale for
the announced change in regime. Tolley and
Friedman’s efficiency arguments survived,
explaining the higher interest rate on required
reserves, which according to the press release
would “essentially eliminate the opportunity cost
of holding required reserves, promoting efficiency
in the banking sector.”
| Effective Federal Funds Rate becomes the new name. (The reason for this is the FOMC now sets upper and lower targets in which the Effective Federal Funds Rate falls between.) |
The payment of interest on excess reserves will permit
the Federal Reserve to expand its balance sheet as
necessary to provide the liquidity necessary to support
financial stability while implementing the monetary
policy that is appropriate in light of the System’s
macroeconomic objectives of maximum employment
and price stability.
www.cato.org/cato-journal/spring/summer-2019/interest-
reserves-history-rationale-complications-risks#history-and-rationale
the Federal Reserve to expand its balance sheet as
necessary to provide the liquidity necessary to support
financial stability while implementing the monetary
policy that is appropriate in light of the System’s
macroeconomic objectives of maximum employment
and price stability.
www.cato.org/cato-journal/spring/summer-2019/interest-
reserves-history-rationale-complications-risks#history-and-rationale
| 2014 (September) |
| 2008 (December) |
| 2008 (December) |
| 2008 (October) |
| 2008 (December) |
| 2021 (July) |
| 2019 (January) |
| History Leading Up to the Ample Reserves Regime (10 minutes) |
| Dual Mandate and the FED Bulls Eye Graph (5 minutes) |
First and foremost, my notes on the Ample-Reserves Framework would not be made possible without the written
work of Scott Wolla (Economic Education Coordinator at The Federal Reserve Bank of St. Louis) and
Jane Ihrig's (Senior Advisor at the Board of Governors of the Federal Reserve System) in their October 2020
FED NOTES, "Closing the Monetary Policy Curriculum Gap: A Primer for Educators Making the Transition
to Teaching the Fed's Ample-Reserves Framework."
www.federalreserve.gov/econres/notes/feds-notes/closing-the-monetary-policy-curriculum-gap-20201023.htm
work of Scott Wolla (Economic Education Coordinator at The Federal Reserve Bank of St. Louis) and
Jane Ihrig's (Senior Advisor at the Board of Governors of the Federal Reserve System) in their October 2020
FED NOTES, "Closing the Monetary Policy Curriculum Gap: A Primer for Educators Making the Transition
to Teaching the Fed's Ample-Reserves Framework."
www.federalreserve.gov/econres/notes/feds-notes/closing-the-monetary-policy-curriculum-gap-20201023.htm
The idea behind the interactive graph is not mine. I found these graphs on Federal Reserve websites
and took the idea and expanded upon their work. See examples below.
and took the idea and expanded upon their work. See examples below.
| 2014 |
| 2019 |
| 2020 |
| 2019 (January) |
A “headline” measure, which is an all-items or overall index.
A “core” measure, which excludes food and energy prices.
As St. Louis Fed President James Bullard detailed in a 2012
Regional Economist article, “The FOMC will target the
headline inflation rate as opposed to any other measure
(e.g., core inflation, which excludes food and energy prices)
because it makes sense to focus on the prices that U.S.
households actually have to pay,” he wrote.
www.stlouisfed.org/open-vault/2019/january/fed-
inflation-target-2-percent
A “core” measure, which excludes food and energy prices.
As St. Louis Fed President James Bullard detailed in a 2012
Regional Economist article, “The FOMC will target the
headline inflation rate as opposed to any other measure
(e.g., core inflation, which excludes food and energy prices)
because it makes sense to focus on the prices that U.S.
households actually have to pay,” he wrote.
www.stlouisfed.org/open-vault/2019/january/fed-
inflation-target-2-percent
September 2022
The Fed’s preferred inflation gauge is the annual change in the Price Index for Personal Consumption Expenditures
(PCE). After more than a decade of missing our average 2 percent target to the downside, PCE inflation has risen quite
quickly—from under 1 percent in mid-2020 to 6.3 percent in the most recent July data. With food and energy prices
excluded, so-called core PCE prices rose 4.6 percent over the past 12 months.
The Fed’s preferred inflation gauge is the annual change in the Price Index for Personal Consumption Expenditures
(PCE). After more than a decade of missing our average 2 percent target to the downside, PCE inflation has risen quite
quickly—from under 1 percent in mid-2020 to 6.3 percent in the most recent July data. With food and energy prices
excluded, so-called core PCE prices rose 4.6 percent over the past 12 months.
| Ample Reserves Regime Graph and ASAD (15 minutes) |
| FED Graph (August 2020 ) |
| FED Graph (May 2019) |
| FED Duel Mandate Bullseye Interactive Graph |
| Interest is paid on required and excess reserves |
| Payment of Interest on Excess Reserves (IOER) becomes a price floor for the Federal Funds Rate. The FFR will NOT move above the IOER. When the IOER moves, the FFR moves in the same direction. |
| What is going to be on the May Exam |
| Contractionary Monetary Policy in an Ample Reserves Regime (5 minutes) |
| Reffonomics Baseball Using the Ample Reserves Regime Graph |
| Reserve Requirement goes to ZERO in response to COVID 19, and the Primary Credit Rate or the Discount Rate is set at the top of the FOMC's Federal Funds Upper Target Range. |
| 2020 (March) |
| Explanation of the Ample Reserves Regime Graph (2 minutes) |
| The term Natural Rate of Unemployment is changed to the term The Non-Cyclical Rate of Unemployment |
| 2021(February) |
A NOTE TO THE WISE: This series last appeared in the February, 2021 report: An Overview of the Economic
Outlook: 2021 to 2031. The suggested substitute for this series is "Noncyclical Rate of Unemployment" (NROU),
formerly called "Natural Rate of Unemployment (Long-Term)."
Outlook: 2021 to 2031. The suggested substitute for this series is "Noncyclical Rate of Unemployment" (NROU),
formerly called "Natural Rate of Unemployment (Long-Term)."
FOMC sets the target range for the upper limit or upper bound.
The Board of Governors then use the FOMC notes and set the
Administered Rate (Primary Credit Rate or Discount Rate) at this
upper limit. This upper limit or upper bound Primary Credit Rate
or Discount Rate is the Ceiling Rate.
The Board of Governors then use the FOMC notes and set the
Administered Rate (Primary Credit Rate or Discount Rate) at this
upper limit. This upper limit or upper bound Primary Credit Rate
or Discount Rate is the Ceiling Rate.
FOMC sets the target range for the lower limit or lower bound.
The Board of Governors then use the FOMC notes and set the
Administered Rate (Interest on Overnight Reverse Repurchase
Agreement (ON RRP) slightly ABOVE the lower limit or bound.
The Interest on ON RRP agreement is the Sub-Floor Rate.
STUDENTS DO NOT HAVE TO KNOW ABOUT Interest on
Overnight Reverse Repurchase Agreement (ON RRP)
FOR THE EXAM!
The Board of Governors then use the FOMC notes and set the
Administered Rate (Interest on Overnight Reverse Repurchase
Agreement (ON RRP) slightly ABOVE the lower limit or bound.
The Interest on ON RRP agreement is the Sub-Floor Rate.
STUDENTS DO NOT HAVE TO KNOW ABOUT Interest on
Overnight Reverse Repurchase Agreement (ON RRP)
FOR THE EXAM!
The Board of Governors takes the FOMC notes and sets the
Administered Rate, which is the Interest on Reserve Balances (IORB
or IOR). Again, this is the PRIMARY MONETARY POLICY
TOOL.
The FED adjusts the Effective Federal Funds Rate (FFR) by raising
or lowering Interest on Reserve Balances (IORB or IOR), the
Floor Rate.
If the FED wants to raise rates, it raises the Interest on Reserve
Balances (IORB or IOR), which in turn raises the Effective Federal
Funds Rate (FFR). If the FED wants to lower rates, it lowers the
Interest on Reserve Balances (IORB or IOR), which in turn lowers
the Effective Federal Funds Rate (FFR).
Administered Rate, which is the Interest on Reserve Balances (IORB
or IOR). Again, this is the PRIMARY MONETARY POLICY
TOOL.
The FED adjusts the Effective Federal Funds Rate (FFR) by raising
or lowering Interest on Reserve Balances (IORB or IOR), the
Floor Rate.
If the FED wants to raise rates, it raises the Interest on Reserve
Balances (IORB or IOR), which in turn raises the Effective Federal
Funds Rate (FFR). If the FED wants to lower rates, it lowers the
Interest on Reserve Balances (IORB or IOR), which in turn lowers
the Effective Federal Funds Rate (FFR).
Using the graph to the left, let's look at the term Basis Points.
A Basis Point is a percentage increase or decrease. One
hundredth of one percent, used chiefly in expressing differences
of interest rates.
For example, if the Interest on Reserves Balances goes
from 3 percent to 3.25 percent, the IORB rose 25 basis points.
If the Interest on Reserves Balances goes from 3.25 percent to
4.00 percent, the IORB rose 75 basis points.
A Basis Point is a percentage increase or decrease. One
hundredth of one percent, used chiefly in expressing differences
of interest rates.
For example, if the Interest on Reserves Balances goes
from 3 percent to 3.25 percent, the IORB rose 25 basis points.
If the Interest on Reserves Balances goes from 3.25 percent to
4.00 percent, the IORB rose 75 basis points.
The Board of Governors Administered Rates are:
Primary Credit Rate or Discount Rate (Ceiling)
Interest on Reserve Balances (IOR or IORB) (Floor)
Interest on Overnight Reverse Repurchase Agreement
(ON RRP). (Sub-Floor)
STUDENTS DO NOT HAVE TO KNOW THIS
INTEREST RATE FOR THE MAY EXAM.
Primary Credit Rate or Discount Rate (Ceiling)
Interest on Reserve Balances (IOR or IORB) (Floor)
Interest on Overnight Reverse Repurchase Agreement
(ON RRP). (Sub-Floor)
STUDENTS DO NOT HAVE TO KNOW THIS
INTEREST RATE FOR THE MAY EXAM.
The Board of Governor's Policy Rate is added in RED:
The Policy Rate is the Effective Federal Funds Rate (FFR)
or the Demand for Reserves.
The Policy Rate (FFR) lies below the Interest on Reserve
Balances (IORB or IOR).
Recall that the Interest on Reserve Balances (IORB or IOR),
which is an Administered Rate, is the PRIMARY TOOLused
by the FED. By changing this rate, the Policy Rate, which is
the Effective Federal Funds Rate (FFR), changes in the same
direction.
The Policy Rate is the Effective Federal Funds Rate (FFR)
or the Demand for Reserves.
The Policy Rate (FFR) lies below the Interest on Reserve
Balances (IORB or IOR).
Recall that the Interest on Reserve Balances (IORB or IOR),
which is an Administered Rate, is the PRIMARY TOOLused
by the FED. By changing this rate, the Policy Rate, which is
the Effective Federal Funds Rate (FFR), changes in the same
direction.
| 2023 (February) Packaging It All Together -- What Should You Teach? |
| Payment of Interest on Overnight Reverse Repurchase Agreements with its Primary Dealers (ON RRP) becomes the sub-floor where the Federal Funds Rate (FFR) can never fall below. |
| STUDENTS DO NOT HAVE TO KNOW THIS FOR THE MAY EXAM, but it becomes an important lesson down the road for the instructor. |
| TEST Yourself on Labeling the Ample Reserves Graph |
| The College Board® Ample Reserves Graph |
There are a few problems with this graph.
1) The y axis is labelled Policy Rate which means it does
NOT include Administered Rates (PCR and IOR)
2) With this graph if you shift the Demand for Reserves (FFR)
upward this Policy Rate moves upward. What this
doesn't take into account is it is the change in the
Administered Rate (IOR) that moves the Policy Rate (FFR)
upward. This can be quite misleading for students.
1) The y axis is labelled Policy Rate which means it does
NOT include Administered Rates (PCR and IOR)
2) With this graph if you shift the Demand for Reserves (FFR)
upward this Policy Rate moves upward. What this
doesn't take into account is it is the change in the
Administered Rate (IOR) that moves the Policy Rate (FFR)
upward. This can be quite misleading for students.
There are a couple of advantages for using this graph.
1) It stresses there are two types of rates on the graph:
Administered Rates (IOR and PCR or DR) and the
Policy Rate (FFR).
2) The interactive part of this graph shows students how the
Board of Governors use Administered Rate change in
the IOR upward or downward, moves the Policy Rate
FFR upward or downward.
1) It stresses there are two types of rates on the graph:
Administered Rates (IOR and PCR or DR) and the
Policy Rate (FFR).
2) The interactive part of this graph shows students how the
Board of Governors use Administered Rate change in
the IOR upward or downward, moves the Policy Rate
FFR upward or downward.
| A Similar Federal Reserve Ample Reserves Graph |
| Current Event: Using HTTPS://FRED graphs (June - September) PLUS TEST: History of The Ample Reserves Regime |