In a speech to the Fed conference in Jackson Hole, Wyoming, mentioned in the chapter opener, Fed
Question:
In a speech to the Fed conference in Jackson Hole, Wyoming, mentioned in the chapter opener, Fed Chair Janet Yellen observed that the financial crisis revealed the Fed’s “inability to control the federal funds rate once reserves were no longer relatively scarce.” She went on to state: “To address the challenges posed by the financial crisis … the Federal Reserve significantly expanded its monetary policy toolkit… . Our current toolkit proved effective last December. In an environment of superabundant reserves, the FOMC raised the effective federal funds rate.”
a. What does Yellen mean by “reserves were no longer relatively scarce”?
b. Briefly explain why, with the monetary policy tools it had used prior to the financial crisis, the Fed could not control the federal funds rate.
c. How was the Fed able to use its new monetary policy tools to increase the federal funds rate in December 2015?
Step by Step Answer:
Money, Banking, and the Financial System
ISBN: 978-0134524061
3rd edition
Authors: R. Glenn Hubbard, Anthony Patrick O'Brien