Fed fund target range as fed increases its fed funds target

Assignment Help Business Economics

Reference no: EM131176506

Assume in parts (a) – (c) that the Fed has decided that a slow (50 basis points per year) rise in the Federal funds rate is likely the correct approach to balancing risks of holding inflation to around 2% per year while maintaining enough growth in GDP and labor markets to achieve and stay at full employment. However, even if this is the correct view, it may no be the view that financial markets, lenders and CEO’s take. (hint: read the material on policy normalization on the Federal reserve website under the tab “monetary policy”)

a) What problems might arise in controlling the Federal Funds rate and other money market short term rates to keep them in the Fed’s target zone as the Fed slowly raises that target zone given the fact that in the aftermath of QE1 through QE3, most banks hold substantial excess reserves?

b) How will the Fed’s ability to pay interest on bank reserves help it deal with these potential problems ?

c) How will short term repo market sales of Treasury securities from the Fed’s balance sheet help it keep money market interest rates and yields within the Fed’s fed fund target range as the Fed increases its Fed funds target?

Reference no: EM131176506

Questions Cloud

Corporation is considering issuing long-term debt : A corporation is considering issuing long-term debt. the debt would have a 30 year maturity and a 10 percent coupon rate and annual payments. the bonds will be sold for $950. additionally, the firm would have to pay floatation costs of 5 percent. the..

According to the expectations hypothesis : According to the expectations hypothesis, what is the expected rate of interest on a 2-year zero coupon bond implied by the following term structure: A 1-year zero coupon bond has a yield to maturity of 2% and a 1 year loan starting 2 years from now ..

Goals for equilibrium inflation rates and employment growth : What are the Fed’s goals for equilibrium inflation rates and employment growth? What circumstances in the US and world economy suggest that a “dovish,”slow approach to raising money market rates is appropriate at this time?

Evaluate generation project with the cash flows : Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows: Year Cash Flow 0 –$43,000,000 1 67,500,000 2 –18,000,000. If the company requires a 11 percent return on its investments, what is the NPV of the project..

Fed fund target range as fed increases its fed funds target : The Fed has decided that a slow rise in the Federal funds rate is likely the correct approach to balancing risks of holding inflation to around 2% per year while maintaining enough growth in GDP and labor markets to achieve and stay at full employmen..

What you think will happen to the current prices of houses : Suppose the prospective buyers of houses become more optimistic about the future prices of houses while at the same time existing owners of houses become more pessimistic about the future prices of housing. Explain what you think will happen to the c..

Rule versus discretion : This question addresses the issue of whether monetary policy should be made by discretionary policy or be implemented according to a set of rules. Which of the following statements reflect arguments against policy by rule?

User Account

All Pages