Dynamic concept Monetary policy

Bond buying program – from an exception handler to a regulation tool

In software industry, exception handling is the process of responding to the occurrence, during computation, of exceptions – anomalous or exceptional events requiring special processing – often changing the normal flow of program execution (refer to Wikipedia). The process of the central banks conducting monetary policies can be considered as a software process, the interest rates being the normal execution of the “software program”. The financial crisis since 2008 is an exception and the U. S. Fed had executed the following four exception handlers.

1. Pushing Fed fund rate close to zero

2. Extending bond mature terms

3. Buying Large scale bond

4. Providing forward looking

When exceptions disappear, exception handlers are supposed to phase out. An interesting finding from the Fed meeting minutes in May 1 is that the bond buying program shall be staying as a regulation tool. The Fed said that “the committee is prepared to INCREASE or DECREASE the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes”.

Due to zero bound interest rate, the Fed has suffered from lacking of regulation tools. I think the Fed is adopting the bond buying program as a regulation tool prior to normalizing interest rates. The Fed seems to have no rush to raise the interest rates.