The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Inflation reduces the value of currency over time, but deflation increases it. This allows more goods and services to be bought than before with the same amount of currency. Deflation is distinct from disinflation, a slowdown in the inflation rate; i.e., when inflation declines to a lower rate but is still positive.
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed. The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited, or borrowed.
Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability. Further purposes of a monetary policy may be to contribute to economic stability or to maintain predictable exchange rates with other currencies. Today most central banks in developed countries conduct their monetary policy within an inflation targeting framework, whereas the monetary policies of most developing countries' central banks target some kind of a fixed exchange rate system. A third monetary policy strategy, targeting the money supply, was widely followed during the 1980s, but has diminished in popularity since that, though it is still the official strategy in a number of emerging economies.
A liquidity trap is a situation, described in Keynesian economics, in which, "after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash rather than holding a debt which yields so low a rate of interest."
In macroeconomics, an open market operation (OMO) is an activity by a central bank to exchange liquidity in its currency with a bank or a group of banks. The central bank can either either transact government bonds and other financial assets in the open market or enter into a repo or secured lending transaction with a commercial bank. The latter option, often preferred by central banks, involves them making fixed period deposits at commercial banks with the security of eligible assets as collateral.
The Federal Reserve System, commonly known as "the Fed," has faced various criticisms since its establishment in 1913. Critics have questioned its effectiveness in managing inflation, regulating the banking system, and stabilizing the economy. Notable critics include Nobel laureate economist Milton Friedman and his fellow monetarist Anna Schwartz, who argued that the Fed's policies exacerbated the Great Depression. More recently, former Congressman Ron Paul has advocated for the abolition of the Fed and a return to a gold standard.
Debt monetization or monetary financing is the practice of a government borrowing money from the central bank to finance public spending instead of selling bonds to private investors or raising taxes. The central banks who buy government debt, are essentially creating new money in the process to do so. This practice is often informally and pejoratively called printing money or money creation. It is prohibited in many countries, because it is considered dangerous due to the risk of creating runaway inflation.
Helicopter money is a proposed unconventional monetary policy, sometimes suggested as an alternative to quantitative easing (QE) when the economy is in a liquidity trap. Although the original idea of helicopter money describes central banks making payments directly to individuals, economists have used the term "helicopter money" to refer to a wide range of different policy ideas, including the "permanent" monetization of budget deficits – with the additional element of attempting to shock beliefs about future inflation or nominal GDP growth, in order to change expectations. A second set of policies, closer to the original description of helicopter money, and more innovative in the context of monetary history, involves the central bank making direct transfers to the private sector financed with base money, without the direct involvement of fiscal authorities. This has also been called a citizens' dividend or a distribution of future seigniorage.
The "Fed model", or "Fed Stock Valuation Model" (FSVM), is a disputed theory of equity valuation that compares the stock market's forward earnings yield to the nominal yield on long-term government bonds, and that the stock market – as a whole – is fairly valued, when the one-year forward-looking I/B/E/S earnings yield equals the 10-year nominal Treasury yield; deviations suggest over-or-under valuation.
The Bank of Canada is a Crown corporation and Canada's central bank. Chartered in 1934 under the Bank of Canada Act, it is responsible for formulating Canada's monetary policy, and for the promotion of a safe and sound financial system within Canada. The Bank of Canada is the sole issuing authority of Canadian banknotes, provides banking services and money management for the government, and loans money to Canadian financial institutions. The contract to produce the banknotes has been held by the Canadian Bank Note Company since 1935.
Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary policy that came into wide application after the financial crisis of 2007–2008. It is used to mitigate an economic recession when inflation is very low or negative, making standard monetary policy ineffective. Quantitative tightening (QT) does the opposite, where for monetary policy reasons, a central bank sells off some portion of its holdings of government bonds or other financial assets.
The Greenspan put was a monetary policy response to financial crises that Alan Greenspan, former chair of the Federal Reserve, exercised beginning with the crash of 1987. Successful in addressing various crises, it became controversial as it led to periods of extreme speculation led by Wall Street investment banks overusing the put's repurchase agreements and creating successive asset price bubbles. The banks so overused Greenspan's tools that their compromised solvency in the global financial crisis of 2007–2008 required Fed chair Ben Bernanke to use direct quantitative easing. The term Yellen put was used to refer to Fed chair Janet Yellen's policy of perpetual monetary looseness.
This is a list of historical rate actions by the United States Federal Open Market Committee (FOMC). The FOMC controls the supply of credit to banks and the sale of treasury securities.
James Brian Bullard is the former chief executive officer and 12th president of the Federal Reserve Bank of St. Louis, a position he held from 2008 until August 14, 2023. In July 2023, he was named dean of the Mitchell E. Daniels Jr. School of Business at Purdue University.
Market monetarism is a school of macroeconomic thought that advocates that central banks target the level of nominal income instead of inflation, unemployment, or other measures of economic activity, including in times of shocks such as the bursting of the real estate bubble in 2006, and in the financial crisis that followed. In contrast to traditional monetarists, market monetarists do not believe monetary aggregates or commodity prices such as gold are the optimal guide to intervention. Market monetarists also reject the New Keynesian focus on interest rates as the primary instrument of monetary policy. Market monetarists prefer a nominal income target due to their twin beliefs that rational expectations are crucial to policy, and that markets react instantly to changes in their expectations about future policy, without the "long and variable lags" postulated by Milton Friedman.
Jerome Hayden "Jay" Powell is an American attorney and investment banker who has served since 2018 as the 16th chair of the Federal Reserve.
Marvin Seth Goodfriend was an American economist. He held the Allan H. Meltzer Professorship in economics at Carnegie Mellon University; he was previously the director of research at the Federal Reserve Bank of Richmond. Following his 2017 nomination to the Federal Reserve Board of Governors, the White House decided to forgo renominating Goodfriend at the beginning of the new term.
The expression "everything bubble" refers to the correlated impact of monetary easing by the Federal Reserve on asset prices in most asset classes, namely equities, housing, bonds, many commodities, and even exotic assets such as cryptocurrencies and SPACs. The policy itself and the techniques of direct and indirect methods of quantitative easing used to execute it are sometimes referred to as the Fed put. Modern monetary theory advocates the use of such tools, even in non-crisis periods, to create economic growth through asset price inflation. The term "everything bubble" first came in use during the chair of Janet Yellen, but it is most associated with the subsequent chair of Jerome Powell, and the 2020–2021 period of the coronavirus pandemic.
Carbon quantitative easing (CQE) is an unconventional monetary policy that is featured in a proposed international climate policy, called a global carbon reward. A major goal of CQE is to finance the global carbon reward by managing the exchange rate of a proposed representative currency, called a carbon currency. The carbon currency will be an international unit of account that will represent the mass of carbon that is effectively mitigated and then rewarded under the policy. The carbon currency will function primarily as a store of value and not as a medium of exchange.
