The US Federal Reserve led by chairwoman Janet Yellen is searching for a new model to replace its old strategy of moving interest rates to make it more suited for the post-crisis financial system, Wall Street Journal reported on Sunday.
“We’re at the early stages of drawing conclusions about what is the best path forward,” Boston Fed president Eric Rosengren told the newspaper in an interview. “We’re in some respects in uncharted grounds.”
In the past, the Fed changed its benchmark interest rate – the fed funds rate — by increasing or decreasing the cash reserves that banks deposit overnight at the central bank, and as the rate moved up or down, rates on credit cards, corporate debt, mortgages and other borrowing costs followed, the report said.
During and after the financial crisis, the Fed flooded the financial system with US$2.6 trillion of reserves, lowering interest rates to near zero. But as it now plans to remove these reserves, the problem is that the amount is too much to be removed quickly, the newspaper said.
“It is my opinion that the fed funds rate is not the right tool going forward,” Dallas Fed president Richard Fisher was quoted as telling reporters recently.
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