Opinion

How the Fed Tightened

Kim Schoenholtz
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So, will the Fed's first-week success continue? Our guess is that it probably will, but we can't rule out a few hazards.
By Kim Schoenholtz and Stephen Cecchetti
Back in August, we explained in our blog the mechanics of how the Fed can tighten policy in today's world of abundant bank reserves. Now that the first policy tightening under the new framework is behind us, we can review how the Fed did it, if there were any surprises, and what trials still lie ahead.

So far, the new process has been extraordinarily smooth - a tribute to planning by the Federal Open Market Committee (FOMC) and to years of testing by the Market Desk of the Federal Reserve Bank of New York (FRBNY). But it's still very early in the game, so uncertainties and challenges surely remain.

On December 16, the FOMC announced an increase in the target range for the federal funds rate (with effect on December 17) from the 0.00%--0 .25% range that prevailed since December 2008 to the new range of 0.25%--0.50%. In contrast to past instances of policy tightening (the most recent was June 2006), the FOMC did not instruct the FRBNY Market Desk to seek "conditions in reserve markets consistent with increasing the federal funds rate" to the new target. Quite the contrary: the Committee directed the Desk to "continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities."

Read full article as published by The Huffington Post.

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Kim Schoenholtz is Professor of Management Practice in the Department of Economics and Director of the Center for Global Economy and Business.