In addition to the above-mentioned factors, the lower economic growth rate also attributes to the sluggish activity in some industries, which, until two years ago, generated a considerable portion of the economic growth. These industries operate in the non-tradable sector, implying that the created product remains in the domestic economy, that is, it cannot be traded in the global markets. To be clearer, I refer to the construction sector and the entire chain of economic activities fuelling it. The sluggish economic activity, or the presence of the negative output gap, leads to the conclusion that there are spare production capacities in the economy. According to the latest analyses, these spare capacities have led to lower inflationary pressures in the economy. Against this background, the Bank of Albania has pursued an accommodative policy, trying to lower the financial intermediation costs (and affecting the cost of credit indirectly), in order to boost investment and consumption and, subsequently, economic activity. We have also supplied the banking system and the Albanian economy with the necessary monetary liquidity, in view of meeting the needs of commercial and economic activity. In addition, through our successful monetary policy, we have accomplished our low inflation objective and have guaranteed a stable macroeconomic and financial environment. This stability, which is the core mission of a modern central bank, allows households, businesses and financial institutions to make financial decisions and take business initiatives amid higher future certainty.
The framework for interest rate control during normalization Now I’d like to talk in more detail about the plans and tools for influencing short-term interest rates that the FOMC will use when it becomes appropriate to raise rates. A target range for the fed funds rate As I noted, during normalization the Committee will continue to communicate the stance of policy through a target for the federal funds rate. The fed funds rate is an overnight, unsecured interest rate in the market for reserves – the rate at which banks and certain other eligible entities borrow or lend balances held at the Fed. 1 The Committee also agreed that it would continue to set a target range for the federal funds rate during normalization. When the FOMC begins to remove accommodation, the level of reserves in the banking system will be very high and the Federal Reserve will be employing new tools to implement policy. Against this backdrop, the Committee has chosen to establish a target range, rather than a point target, in order to provide an appropriate degree of flexibility in policy implementation. A key advantage to targeting the fed funds rate is that the Committee has done so successfully for many decades. As a result, it’s a familiar rate for the public in judging the stance of monetary policy, and its continued use simplifies the Fed’s communications. While the Committee has targeted the fed funds rate for many decades, activity in the fed funds market has changed considerably in recent years.