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Monetary tightening or Monetary loosening

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The Fed loosened monetary policy in various ways in 2007, but has recently started tightening monetary policy again. Explain how each instrument they have used works and whether it is a loosening or tightening policy. (1 sentence explanation):

1) Lower the target federal funds rate: monetary tightening or loosening?

2) Lower the cost of discount window lending: monetary tightening or loosening?

3) The Fed pays banks a positive interest rate on the reserves they hold at the Central Bank: monetary tightening or loosening?

4) Offer discount window access to a broader range of financial institutions: monetary tightening or loosening?

5) Implementing an open market purchase of bonds: monetary tightening or loosening?

6) Purchasing Mortgage-Backed Securities: monetary tightening or loosening?

7) Purchasing medium maturity Treasury Bonds (QE2): monetary tightening or loosening?

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Solution Summary

This solution helps to differentiate between monetary tightening and monetary loosening.

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Answer:
1) Monetary loosening: Lowering the target federal funds rate is monetary loosening because with lower fund rate Fed increases money supply in the system.
2) Monetary loosening: Lowering the cost of discount window lending is monetary loosening because it relieves liquidity strains for individual depository ...

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Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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