Federal Reserve Report Defends Use of New Tools to Set Interest Rates Report is
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Federal Reserve Report Defends Use of New Tools to Set Interest Rates Report is released ahead of Fed Chairman Jerome Powell' By s congressional testimony next week Nick Timiraos Updated July 13, 2018 11:17 a.m. ET WASHINGTON-The Federal Reserve defended ha tools that include paying interest to banks, in its semiannual report to Congress o ving the flexibility to set interest rates by using relatively new n Friday Fed Chairman Jerome Powell is scheduled to testify on Capitol Hill ove Senate as part of hearings mandated by law. The Fed released Some lawmakers, particularly in the House of Representatives, have criticized t r two days beginning Tuesday in the its report ahead of those hearing he Fed in recent years for the use of new facilities that enabled the central bank to guide short-term interest rate much larger portfolio of bonds and other assets than existed before the 2008 financi s higher while maintaining a l c Those criticisms reflect in part broad Fed undertook from 2008 th zero. er concern on the part of those lawmakers with the emergency steps the rough 2014 to stimulate growth after the central bank cut interest rates to near The report released Friday included a three-page overview of its new tools that could rebuttal against any further concerns lawmakers might raise next week. serve as a pre-emptive The Fed dramatically expanded its bond portfolio after the 2008 financial crisis as it un campaigns to stimulate the economy by purchasing Treasury and mortgage securitie the amount of deposits, known as reserves, that banks maintain in accounts at the Fed leashed successive s. Those purchases swelled The vast inc made it harder for the Fed to change interest rates by buying or selling securities in the open mar before 2008. In order to raise its benchmark federal-funds rate without first draining its bond holdings and the accompanying bank reserves, the central bank implemented new tools to guide the fed-funds rate in a ce rease in reserves, which rose to more than $2.5 trillion in 2014 from about $15 billion in 2007 ket, as it had rtain range, including by paying interest on those reserves. Without the new tools, the Fed "would not have been able to gradually raise the federal-funds rat e" while maintaining a larger portfolio, the report said. Instead, it would have had to consider "a rapid and sizable eduction" to the bond portfolio to push up borrowing costs uestion: Why would "a rapid and sizable reduction" to the bond portfolio to push up borrowing costs?Explanation / Answer
Answer:
Bond portfolio means exclusively investing in the bonds so the investments on bonds will rapidly decrease it will raise the cost of borrowing as investments ahs reduced so it will reduce the return on the bonds which will lead to reduction in the income of people which they will use for paying their borrowings. So it will increase the cost of borrowings for them.
the more the bond portfolio will reduce the higher the borrowing cost will become.
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