The Kansas City Federal Resereve holds its annual meeting starting August 22, 2024
The Federal Reserve Bank of Kansas City hosts dozens of central bankers, policymakers, academics and economists from around the world at its annual economic policy symposium in Jackson Hole, Wyoming.
The participants convene to discuss the economic issues, implications, and policy options pertaining to the symposium topic. The symposium proceedings include papers, commentary, and discussion.
The 2024 Economic Policy Symposium, "Reassessing the Effectiveness and Transmission of Monetary Policy," will be held August 22-24.
In an effort to bring readers up to speed on this years symposium topic I have included this exerpt from March 27, 2023
Implementation and Transmission of Monetary Policy
Governor Philip N. Jefferson
At the H. Parker Willis Lecture, Washington and Lee University, Lexington, Virginia
Monetary policy is transmitted to the rest of the economy by affecting financial market prices, such as long-term interest rates, which in turn affect the decisions of households and businesses. Previously, I discussed how changes in the federal funds target range are transmitted to short-term interest rates, such as the overnight reverse repo rates, through arbitrage relationships.
Short-term interest rates, in turn, affect long-term interest rates through investors' expectations. More specifically, according to the expectations theory of the term structure of interest rates, intermediate- and long-term interest rates are the weighted average of expected future short-term interest rates. In addition, monetary policy affects risk premiums. Tighter monetary policy tends to reduce the willingness of investors to bear risk, making them less willing to invest in long-term assets, which means that their return (interest rate) must increase for investors to buy these assets.
Figure 7 illustrates how long-term interest rates, which are widely viewed as important for businesses' and households' economic decisions, move in anticipation of changes in the federal funds rate. The red line is the average 10-year triple-B corporate bond rate. It is a measure of corporate borrowing costs. The blue line is the average 30-year mortgage rate. It is a measure of household borrowing costs. Notice that both measures increased in early 2022 in response to Fed communications and in anticipation of increases in the effective federal funds rate, the black line. Higher long-term interest rates increase the cost of borrowing money for households and businesses. Therefore, high interest rates raise the incentive to save, which in turn dampens consumer spending on interest rate-sensitive expenditures, like housing and automobiles, and slows businesses' investment in new equipment. The decrease in spending decreases the overall demand for goods and services in the economy, thereby reducing the demand/supply imbalances we have seen, and, consequently, reduce inflationary pressures. As a result, the inflation rate should fall back toward 2 percent, the FOMC's inflation rate target.
A key question is how much the tightening of financial conditions since late 2021 has contributed to reducing aggregate demand and inflationary pressures. In Figure 8, you can see that inflation, measured using the personal consumption expenditures price index, has started to come down. Some of the disinflation, or reduction in the inflation rate, is due to monetary policy tightening, and some of this disinflation is due to other factors, such as supply chain bottlenecks easing and falling energy prices. Chair Powell and other colleagues in the Federal Reserve System have pointed out that monetary policy affects the economy and inflation with long, variable, and highly uncertain lags, and we are still learning about the full effect of our tightening thus far.
Conclusion The Fed has a congressional mandate of maximum employment and price stability. The FOMC conducts monetary policy by setting the target range for the federal funds rate. Then, the Fed uses its monetary policy tools to implement the policy, which guides market interest rates toward the Fed's desired setting of policy. The Fed implements monetary policy using administered rates.
The interest rate on reserve balances is the Fed's primary tool for adjusting the federal funds rate. The overnight reverse repurchase agreement facility is a supplementary tool that sets a floor for the federal funds rate. The discount rate serves as a ceiling for the federal funds rate. The Fed ensures that the banking system has ample reserves, using open market operations, if needed.
Currently, we are tightening monetary policy. Changes in the federal funds rate are transmitted to other interest rates through arbitrage and by affecting investors' expectations. Changes in interest rates affect the decisions of consumers and businesses with a lag. Their decisions ultimately move the economy toward maximum employment and price stability.
Thank you.
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