Bond Fundamentals – Monetary Policy and Fiscal Policy

It’s the Federal Reserve Bank that influences the money supply. Three tools are used to implement monetary policy:

  1. Open Market Operations
  2. Discount Rates
  3. Reserve Requirements

Since open market operations is the tool used most, we will cover it. Here’s how it works: When the economy is growing too fast and the Fed is worried about the inflation rate, it will sell government securities from its portfolio to the open market. This decreases bank reserves, which means the money supply decreases. When there are less bank and businesses have to pay the bank more in order to borrow. This discourages consumers and businesses from borrowing. Less borrowing means less spending, which slows the economy and eventually can reduce price pressures.

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Revive Lincoln’s Monetary Policy – An Open Letter to President Obama

Dear President Obama:

The world was transfixed on that remarkable day in January when, to poetry, song, and dance, you gazed upon Abraham Lincoln’s likeness at the Lincoln Memorial and searched for wisdom to navigate these difficult times. Indeed, you have so many things in common with that venerable President that one might imagine you were his reincarnation in different dress. You are both thin and wiry, brilliant speakers, appearing on the national stage at pivotal times. Fertile imaginations could envision you coming back dressed in that African heritage you freed, to help heal the great scar of slavery and prove once and for all the proposition that all men are created equal and can achieve great things if given a fighting chance.

As Wordsworth said, however, our birth is but a sleep and a forgetting; and if that is true, you may have forgotten a more subtle form of slavery from which Lincoln tried less successfully to free his countrymen. You may have forgotten it because it has been omitted from our popular history books, leaving Americans ill-equipped to interpret the lessons of our own past. This letter is therefore meant to remind you.

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Monetary policy and long-term interest rates: a survey of empirical literature.

This paper surveys recent empirical literature on effects of monetary policy on long-term interest rates. Most studies reviewed here suggest that tightening monetary policy results in higher long-term interest rates. But available evidence suffers from conceptual and empirical problems and fails to indicate the magnitude of short-run and long-run policy effects on long rates. Also, recent studies have not investigated the possibility of shifts in recent-year effects of monetary policy on long rates. Finally, the paper offers a policy perspective on limitations of existing evidence and suggests future research on monetary policy effects on long rates.

I. INTRODUCTION

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