This operating framework changed as the financial crisis deepened. By December 2008, the FOMC had lowered its target for the federal funds rate from a point target of 5¼ percent in mid-2007 to a target range of zero to ¼ percent. With the federal funds rate and other shortterm interest rates effectively at the zero lower bound, the FOMC’s operating objective for OMOs was expanded to include adjustments in the size and composition of the Federal Reserve’s securities portfolio. In particular, the FOMC initiated large-scale asset purchases (LSAPs) of agency mortgage-backed securities (MBS), agency debt, and later longer-term Treasury securities, in order to put downward pressure on longer-term interest rates, support mortgage markets, and help make broader financial conditions more accommodative. The expansion of the domestic securities portfolio that resulted from LSAPs vastly increased the supply of reserve balances in the system (Figure 1). 4 Importantly, in October 2008, the Fed was granted authority to pay interest on depository institutions’ reserve balances. 5 In an environment of elevated reserve balances that resulted from the Fed’s asset purchases, the payment of interest on excess reserves (IOER) – currently at a rate of ¼ percent – has kept the overnight federal funds rate within its target range (Figure 2).
In our baseline scenario, we continue to forecast that GDP will gradually regain higher expansion rates, backed by favorable external conditions, the end of the mining investment adjustment, no big macroeconomic mismatches and a clearly expansionary monetary policy stance. This scenario also assumes that fiscal policy will remain on its consolidation path, expressed in the immediate future in the upcoming budget aligned with the Administration’s commitments. All this in a context in which potential growth steadily approaches trend-consistent levels. Accordingly, our projections show no major changes compared to our June estimates. For this year, we foresee that the economy will grow between 1.25% and 1.75% (1% to 1.75% in June). For 2018, we continue to expect growth to pick up, to a range between 2.5% and 3.5%, identical to our June forecast. On the expenditure side, our growth forecast for private consumption is slightly adjusted upward in 2017, considering the rebound of the real wage bill observed so far, the recovery of confidence indicators, the necessary replenishment of durable goods inventories and an appreciation of the real exchange rate. In investment, the downward adjustment of projections for 2017 stems primarily from construction, including the mining, infrastructure and housing components. This latter one because of the high stock of new homes for sale that still persists.