Should the U.S. Federal Reserve increase the federal funds rate in 2016? An assessment based on the neutral interest rate

PurposeThis paper quantifies the effects of recent Federal Reserve interest rate changes, specifically recent hikes and cuts in the federal funds rate since 2015, on Midwest farmland values.Design/methodology/approachThe authors apply three autoregressive distributed lag (ARDL) models to a panel data of state-level farmland values from 1963 to 2018 to estimate the dynamic effects of interest rate changes on the US farmland market. We focus on the I-states, Lakes states and Great Plains states. The models in the study capture both short-term and long-term impacts of policy changes on land values.FindingsThe authors find that changes in the federal funds rate have long-lasting impacts on farmland values, as it takes at least a decade for the full effects of an interest rate change to be capitalized in farmland values. The results show that the three recent federal funds rate cuts in 2019 were not sufficient to offset the downward pressures from the 2015–2018 interest rate hikes, but the 2020 cut is. The combined effect of the Federal Reserve's recent interest rate moves on farmland values will be positive for some time starting in 2022.Originality/valueThis paper provides the first empirical quantification of the immediate and long-run impacts of recent Federal Reserve interest rate moves on farmland values. The authors demonstrate the long-lasting repercussions of Federal Reserve's policy choices in the farmland market.

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Deleveraging and Monetary Policy: Japan Since the 1990s and the United States Since 2007

The Journal of Economic Perspectives ◽

10.1257/jep.26.3.177 ◽

2012 ◽

Vol 26 (3) ◽

pp. 177-202 ◽

Cited By ~ 32

Author(s):

Kazuo Ueda

Keyword(s):

United States ◽

Monetary Policy ◽

Great Recession ◽

Federal Reserve ◽

The United States ◽

Federal Funds ◽

Federal Funds Rate ◽

The Great Recession ◽

Policy Responses ◽

The U.S

As the U.S. economy works through a sluggish recovery several years after the Great Recession technically came to an end in June 2009, it can only look with horror toward Japan's experience of two decades of stagnant growth since the early 1990s. In contrast to Japan, U.S. policy authorities responded to the financial crisis since 2007 more quickly. Surely, they learned from Japan's experience. I will begin by describing how Japan's economic situation unfolded in the early 1990s and offering some comparisons with how the Great Recession unfolded in the U.S. economy. I then turn to the Bank of Japan's policy responses to the crisis and again offer some comparisons to the Federal Reserve. I will discuss the use of both the conventional interest rate tool—the federal funds rate in the United States, and the “call rate” in Japan—and nonconventional measures of monetary policy and consider their effectiveness in the context of the rest of the financial system.

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Outside the Box: Unconventional Monetary Policy in the Great Recession and Beyond

The Journal of Economic Perspectives ◽

10.1257/jep.32.4.121 ◽

2018 ◽

Vol 32 (4) ◽

pp. 121-146 ◽

Cited By ~ 28

Author(s):

Kenneth N. Kuttner

Keyword(s):

Interest Rate ◽

Federal Reserve ◽

Balance Sheet ◽

Federal Funds ◽

Federal Funds Rate ◽

Monetary Policies ◽

The Great Recession ◽

Mortgage Backed Securities ◽

Policy Statements ◽

Government Sponsored Enterprises

In November 2008, the Federal Reserve faced a deteriorating economy and a financial crisis. The federal funds rate had already been reduced to virtually zero. Thus, the Federal Reserve turned to unconventional monetary policies. Through “quantitative easing,” the Fed announced plans to buy mortgage-backed securities and debt issued by government-sponsored enterprises. Subsequent purchases would eventually lead to a five-fold expansion in the Fed’s balance sheet, from $900 billion to $4.5 trillion, and leave the Fed holding over 20 percent of all mortgage-backed securities and marketable Treasury debt. In addition, Fed policy statements in December 2008 began to include explicit references to the likely path of the federal funds interest rate, a policy that came to be known as “forward guidance.” The Fed ceased its direct asset purchases in late 2014. Starting in October 2017, it has allowed the balance sheet to shrink gradually as existing assets mature. From December 2015 through June 2018, the Fed has raised the federal funds interest rate seven times. Thus, the time is ripe to step back and ask whether the Fed’s unconventional policies had the intended expansionary effects—and by extension, whether the Fed should use them in the future.

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Changes In The Regional Responsiveness To Federal Reserve Policy Shocks And The Declining Importance Of Interest Rate Sensitive Industry Sectors

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v4i12.2725 ◽

2011 ◽

Vol 4 (12) ◽

Author(s):

Todd Potts ◽

David Yerger

Keyword(s):

Interest Rate ◽

Federal Reserve ◽

Oil Price ◽

Oil Price Shocks ◽

Sample Period ◽

Font Size ◽

Price Shocks ◽

Federal Funds ◽

Federal Funds Rate ◽

Policy Shocks

This paper extends the existing research on regional economic responses to federal-reserve policy shocks along two dimensions.  First, we focus on the evolution over time of a particular region’s responsiveness to federal funds shocks.  This differs from prior work that analyzed differences across regions in their responsiveness to a federal funds shock over a single sample period.  For the state of Delaware, we track how the declining importance of manufacturing and construction alters the region’s income response to both federal funds rate and oil price shocks.  Delaware was selected for analysis because of the large decline since the 1970’s in the share of its Gross State Product coming from construction and manufacturing. This paper’s second extension of the literature is its use of sequential updating of the data set.  Prior research utilized quarterly data sets starting in the late 1950’s and ending in the early 1990’s.  We construct a parsimonious structural VAR model and first estimate the model over the 1958Q1 to 1992 Q4 period. Over this period our results are consistent with earlier findings.  Next, we roll the sample period forward one year at a time, keeping the time period’s length constant, up through 2004 Q2 and re-estimate the model after each resetting of the sample period.  Overall, our findings are consistent with the view that declines in the importance of interest rate sensitive sectors will lead to declines in the responsiveness of a region’s income growth to federal funds rate shocks, but the magnitude of the observed decline in income sensitivity is considerably smaller than what one would forecast based upon the earlier cross-sectional based research.  The impact of oil price shocks, however, was contrary to ‘conventional wisdom’ expectations.  Despite the declining share of manufacturing in GSP for Delaware over the rolling sample periods, there was a modest increase in the sensitivity of Delaware real personal income to oil price shocks as the sample period rolled forward.

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A mixture autoregressive model based on Gaussian and Student’s t-distributions

Studies in Nonlinear Dynamics & Econometrics ◽

10.1515/snde-2020-0060 ◽

2021 ◽

Vol 0 (0) ◽

Author(s):

Savi Virolainen

Keyword(s):

Interest Rate ◽

Autoregressive Model ◽

Autoregressive Models ◽

Federal Funds ◽

Treasury Bill ◽

Federal Funds Rate ◽

Empirical Application ◽

Model Based ◽

Interest Rate Spread ◽

Student’S T

Abstract We introduce a new mixture autoregressive model which combines Gaussian and Student’s t mixture components. The model has very attractive properties analogous to the Gaussian and Student’s t mixture autoregressive models, but it is more flexible as it enables to model series which consist of both conditionally homoscedastic Gaussian regimes and conditionally heteroscedastic Student’s t regimes. The usefulness of our model is demonstrated in an empirical application to the monthly U.S. interest rate spread between the 3-month Treasury bill rate and the effective federal funds rate.

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The Potential Increase in Corporate Debt Interest Rate Payments from Changes in the Federal Funds Rate

FEDS Notes ◽

10.17016/2380-7172.2076 ◽

2017 ◽

Vol 2017 (2076) ◽

Cited By ~ 1

Author(s):

Ashish Kumbhat ◽

◽

Francisco Palomino ◽

Ander Perez-Orive ◽

◽

...

Keyword(s):

Interest Rate ◽

Corporate Debt ◽

Federal Funds ◽

Federal Funds Rate ◽

Potential Increase

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The Federal Reserve System and the federal funds rate: evaluating the Fed's rate-targeting decisions through the use of Taylor-type monetary policy rules

10.31274/rtd-180813-7887 ◽

2004 ◽

Author(s):

Michelle Lynn Mireault

Keyword(s):

Monetary Policy ◽

Federal Reserve ◽

Federal Reserve System ◽

Federal Funds ◽

Federal Funds Rate ◽

Policy Rules ◽

Monetary Policy Rules ◽

Reserve System

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A Structural Measure of the Shadow Federal Funds Rate

Finance and Economics Discussion Series ◽

10.17016/feds.2021.064 ◽

2021 ◽

Vol 2021 (064) ◽

pp. 1-40

Author(s):

Callum Jones ◽

◽

Mariano Kulish ◽

James Morley ◽

◽

...

Keyword(s):

Interest Rate ◽

Lower Bound ◽

Interest Rates ◽

Term Structure ◽

Structural Model ◽

Federal Funds ◽

Federal Funds Rate ◽

Interest Rate Policy ◽

Rate Policy ◽

Structural Measure

We propose a shadow policy interest rate based on an estimated structural model that accounts for the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and increases the shadow rate compared to an unconstrained systematic policy response. By contrast, forward guidance and other unconventional policies that extend the expected duration of zero-interest-rate policy are expansionary and decrease the shadow rate. By quantifying these distinct effects, our structural shadow federal funds rate better captures the stance of monetary policy given economic conditions than a shadow rate based only on the term structure of interest rates.

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The dynamic relationship between the federal funds rate and the Eurodollar rates under interest‐rate targeting

Journal of Economic Studies ◽

10.1108/01443580710745380 ◽

2007 ◽

Vol 34 (2) ◽

pp. 90-102 ◽

Cited By ~ 5

Author(s):

Su Zhou

Keyword(s):

Interest Rate ◽

Federal Funds ◽

Federal Funds Rate ◽

Dynamic Relationship

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Forecast accuracy of a BVAR under alternative specifications of the zero lower bound

Studies in Nonlinear Dynamics & Econometrics ◽

10.1515/snde-2015-0084 ◽

2017 ◽

Vol 21 (2) ◽

Author(s):

Tim Oliver Berg

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Lower Bound ◽

Forecast Accuracy ◽

Zero Lower Bound ◽

Federal Funds ◽

Federal Funds Rate ◽

Policy Shocks ◽

Density Forecasts ◽

Effect Of Monetary Policy

AbstractThis paper discusses how the forecast accuracy of a Bayesian vector autoregression (BVAR) is affected by introducing the zero lower bound on the federal funds rate. As a benchmark I adopt a common BVAR specification, including 18 variables, estimated shrinkage, and no nonlinearity. Then I entertain alternative specifications of the zero lower bound. I account for the possibility that the effect of monetary policy on the economy is different in this regime, replace the federal funds rate by its shadow rate, consider a logarithmic transformation, feed in monetary policy shocks, or utilize conditional forecasts allowing for all shocks implemented through a rejection sampler. The latter two are also coupled with interest rate expectations from future contracts. It is shown that the predictive densities of all these specifications are greatly different, suggesting that this modeling choice is not innocuous. The comparison is based on the accuracy of point and density forecasts of major US macroeconomic series during the period 2009:1 to 2014:4. The introduction of the zero lower bound is not beneficial per se, but it depends on how it is done and which series is forecasted. With caution, I recommend the shadow rate specification and the rejection sampler combined with interest rate expectations to deal with the nonlinearity in the policy rate. Since the policy rate will remain low for some time, these findings could prove useful for practical forecasters.

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