February 20th, 2015
from the New York Fed
The Federal Reserve's responses to the 2007-2009 financial crisis, the recession, and their aftermath included important changes in the conduct of monetary policy. The Federal Reserve rapidly reduced its target for the federal funds rate (FFR) to its effective lower bound, introduced facilities to provide ample liquidity and to maintain the flow of credit in the economy, and purchased large amounts of longer-term securities. One consequence of these changes is that the Federal Reserve will likely need to employ new tools when it begins to raise the FFR and other short-term interest rates to more normal levels.
One new monetary policy tool, the payment of interest on banks' reserves held at the Federal Reserve, has been in place since 2008. The Federal Open Market Committee (FOMC or "Committee") has indicated that interest on reserves will play a key role during the process of normalizing monetary policy (FOMC 2014c). Nonetheless, evidence in recent years indicates that the payment of interest on reserves may not provide the degree of control over the FFR and other short-term interest rates that the Committee desires, and supplementary tools might be needed to provide that level of control.
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