Monetary tools

In her speech at the 2017 Herbert Stein Memorial Lecture, Fed Chair Janet Yellen explained the tools that were used by the Fed to combat the economic slowdown in the aftermath of the 2007 financial crisis. As part of the unconventional monetary policy, the US Fed has used two key tools: large-scale asset purchases and providing forward guidance about intentions for the path of short-term interest rates.

Janet Yellen: The Challenges of Additional Accommodation

Impact of these measures

The tools the Fed used resulted in keeping short-term interest rates low and, as the Fed started purchasing assets, it helped maintain lower long-term rates as well. This combined mechanism resulted in lowering the yield (TBT) or interest rates (BND) demanded by investors even for long-term securities (TLT). Yellen said that several studies have found that the two-pronged approach has resulted in a substantial reduction in long-term interest rates. Lower interest rates, in Yellen’s view, have resulted in lower borrowing costs for individuals and companies, resulting in increased consumption, corporate spending that helped avoid disinflation (TIP), and a reduced unemployment rate.

Criticism of the accommodative policy

Janet Yellen addressed criticism about the slow pace of economic recovery despite this additional accommodation by pointing out that the recovery would have been much slower without these measures. Yellen has also said that other central banks that followed the Fed’s initiative have accumulated evidence that such unconventional monetary policy measures have helped stimulate their respective economies’.

It’s hard to point out the catalyst for economic recovery, but these accommodative measures, even if slow, have benefited some quarters of the economy. Lower borrowing costs usually aid consumption in the form of new homes, cars, and capital expenditure. The other advantage was a weaker US dollar (UUP) that improved the competitiveness of US companies.

In the next part of this series, we’ll discuss the challenges the Fed has faced in scaling back monetary accommodation.

Latest articles

19 Jul

Barrick Gold Reaches Deal to Buy Acacia Mining

WRITTEN BY Anuradha Garg

After a long standoff, Barrick Gold (GOLD) and Acacia Mining (ABGLF) have reached an agreement.

19 Jul

Comcast Shares Pop on Goldman's Optimism

WRITTEN BY Ruchi Gupta

Comcast (CMCSA) shares popped after Goldman Sachs issued a positive note on the company recently. Goldman upgraded its rating for Comcast to "buy" from "hold."

19 Jul

Why Analysts Are Bearish on Netflix Stock

WRITTEN BY Aditya Raghunath

Netflix stock fell over 10.0% on Thursday and is down 0.5% today as well.

On Thursday, pet retailer Chewy (CHWY) reported its first-quarter results after the market closed. The company reported its earnings for the first time.

Kenya’s Safaricom and South Africa’s Vodacom want to team up to purchase M-Pesa rights from Vodafone (VOD).

Cleveland-Cliffs (CLF) released its second-quarter results today before the markets opened.