Two senior policy advisors at the Richmond Fed make the case in the Bank’s latest Economic Brief that open market operations might be adequate to achieve interest rate control without resorting to extensive targeted lending.
Authors Huberto M. Ennis and John A. Weinberg explore two perspectives on the role of central bank lending in the conduct of monetary policy — one that views direct central bank lending to market participants as necessary at times and one that views such lending as nonessential for effective monetary policy implementation. Which perspective is favored largely depends on how policymakers assess frictions that inhibit the ability of financial markets to allocate liquidity, according to the authors.
They conclude that it’s possible such frictions could justify direct central bank lending in some situations, but argue that the potential costs of lending and our current limited understanding of those frictions suggest policymakers should be cautious about subscribing to such an approach.
The Richmond Fed serves the Fifth Federal Reserve District, which includes the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia. As part of the nation's central bank, we're one of 12 regional Reserve Banks that work together with the Federal Reserve's Board of Governors to strengthen the economy and our communities. We manage the nation's money supply to keep inflation low and help the economy grow. We also supervise and regulate financial institutions to help safeguard our nation's financial system and protect the integrity and efficiency of our payments system.