Monetary Policy Analysis > Possible Additions to the Policy Toolkit
Date: August 21, 2019
From: Bill Nelson
Subject: Possible Additions to the Policy Toolkit
The minutes of the July FOMC meeting released today indicate that FOMC participants expect to discuss “possible additions to the policy toolkit” at upcoming meetings. Note that these are tools in addition to “alternative policy strategies” and “changes to communication practices,” so they mean actual new policy tools.
I thought you might find a list of some of the possibilities that have been discussed in staff memos to the FOMC (since made public) over the past decade interesting. I have largely excluded from this list tools that were subsequently used (forward guidance and acquiring longer-term Treasuries and Agencies) or slight variants.
December 5, 2008, Targeting Term Funding Conditions in U.S. Depository Institutions
- Using auctions of term deposits and term discount window loans to target term bank funding rates.
December 5, 2008, Liquidity Facilities as Policy Tools at the Zero Bound
- Providing credit using emergency authority directly to businesses and households rather than through intermediaries.
October 13, 2010, Strategies for Targeting Interest Rates Out the Yield Curve
- Enforce an interest rate cap on Treasury securities using a standing facility or asset purchases following one of three strategies:
- Announce an interest rate cap on Treasury securities that mature for a period consistent with policy rate forward guidance.
- Announce an interest rate cap for a specific range and then lengthen the range as needed.
- Announce a cap on longer-term Treasury yields.
- Undertake financing transactions (such as options on term RPs) to reinforce forward guidance.
- Purchase government securities to target credit availability in specific sectors such as SBA securities, short-term municipal securities, or agency CMBS.
- Buy the fixed-rate side of interest rate swaps.
- Extend term-funding to banks at below-market rates against targeted types of collateral (newly originated small business loans, newly originated mortgage loans).
- Extend such loans on a nonrecourse basis with only limited haircut to absorb credit risk.
- Direct principal payments on agency securities into purchases of longer-term Treasury securities.
- Establish a standing fixed-rate term repo facility that conducts repos with terms that extended until the end of the forward-guidance period.
- Establish a standing purchase facility to cap rates on Treasury securities that mature until the end of the forward guidance period.
- Establish a standing overnight repo facility or sell options on repos for a period coincident with the forward guidance period.
- Operate in forward markets: purchase forward agreements to purchase bills at selected periods in the future.
Only FOMC memos up until 2013 have been released to date. Interestingly, the FOMC only releases some memos, not all memos (you can tell because at times the meeting transcripts mention memos that were sent to the FOMC but are not among the memos that have been released). I don’t know the criteria they apply to decide which get released.
Note that these were all instruments the FOMC chose not to adopt, so they all evidently had shortcomings. Moreover, in some instances (although only a few) the memos indicate that there were open questions about whether the Fed had the legal authority to use the specific tool. For an excellent paper on the scope of the Fed’s authorized monetary policy actions, see Small and Clouse (2004).
As always, comments and questions welcome and please let me know if you are tired of me clogging up your inbox.
Disclaimer: The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Bank Policy Institute or its membership, and are not intended to be, and should not be construed as, legal advice of any kind.