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Bias Monetary Fed Project

Friedman's Fantastic Four's presentation on what the Federal Reserve should do to fix the economy, 3/19/13

Ben Rusk

on 19 March 2013

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Transcript of Bias Monetary Fed Project

Friedman's Fantastic Four What the FOMC Should Do A New Classical Perspective Mortgage Backed Securities Current Monetary
Policy Position Where are we now? We based our thoughts upon a New Classical perspective throughout this project. Thus, we relied on rational expectations to make our opinions, along with the view that monetary policy is only effective when it provides a differential between expectations and realities. Current Fed Funds rate Banking System Health The Banking System's Health can be measured by multiple criteria. Some of them are below. Rational Expectations Rational Expectations mean that people, on their own, will come up with reasonable assumptions of the future of the economy. This model centers entirely around this idea, coming to the conclusion that monetary policy only works if the results differ from Rational Expectations. Since monetary policy is what we're working with, this is the core of our argument. This graph shows the regression between the 30
Year Mortgage Rate and the number of mortgage
backed securities held by the Federal Reserve. This week ; 0.75
Month ago; 0.75
A Year ago; 0.75 Half of the assignment was to come up with answers to the question: "Where are we now?" The next few slides provide those answers. Current discount rate This week; 0.25
Month ago; 0.25
A Year ago; 0.25 Required reserves Current Monetary
Policy Position Less than $12.4 million 0 % 12-27-12
$12.4m to $79.5m 3 % 12-27-12
More than $79.5 million 10 % 12-27-12
Nonpersonal time deposits 0 % 12-27-90
Eurocurrency liabilities 0 % 12-27-90 Net Loan Losses ALLL: Allowance for Loan and Lease Losses Total Checkable Deposits Current Monetary
Policy Position Time Series and Trends Federal Reserve Balance Sheet Source: http://www.learnbonds.com/fed-balance-sheet/ In 2008-09, there was an explosion of reserves stored at the Fed (As a result of IROR) and the Fed began purchasing large quantities of Mortgage-Backed Securities Current Monetary
Policy Position Monetary Aggregates Current Monetary
Policy Position Interestingly, the recession caused a brief, large swell in MZM and a smaller swell in M2. M1 was unaffected. Interest Rates on Reserves In December 2008, the Fed introduced a new program, called Interest Rates on Reserves (IROR). This pays a rate of 0.25% on both required and excess reserves held at the Federal Reserve.

The reason for Interest on Required Reserves is compensation for the Opportunity Cost Tax of requiring reserves.

The reason for Interest on Excess Reserves is to give money greater liquidity. Our Goals We would vote for a new rule:
As soon as inflation and unemployment have reached .5% above the natural rate, a graduated phasing out of IROR for excess reserves will begin, eliminating the program entirely by the time they hit their natural rates. Our Goals, Continued Monetary Policy should be used such that the real results exceed expected until the natural rate is reached, at which point it should equal it in order to avoid another bubble. M2 and Inflation
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