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When the problem is too much money chasing too few goods, regardless of the cause you can drain the oversupply of money. If supply constricts, then you constric
by jnordwick 9y ago
When the problem is too much money chasing too few goods, regardless of the cause you can drain the oversupply of money. If supply constricts, then you constrict the money supply. One way you can always do that is buy borrowing, taxing, or selling and extinguishing the money received. The fed does a version of this to target the overnight rate.
- RobertoG 9y agoI understand how taxing reduce money in the economy but I don't understand your reference to the overnight rate. My understanding is that the overnight rate gives the fed the power of making more expensive for banks to give credits, but only if there is a deficit of money, in the inter-bank market, respect the demand of credits by firms and families. Are you talking about that?
- jnordwick 9y agoThe fed funds rate is basically banks borrowing from each other to meet nightly reserve requirements. The fed open market iterations steps in and buys/sells that overnight debt creating/destroying money in the process. After QE it now does a lot more of this on the long end too. The fed only really influences that rate, and it does go off script. The link between the overnight rate and longer maturities has always been tenuous. Banks borrow I the short end, consumers on the longer end. Before QE, the Fed often had a difficult time pushing the long end around, but with QE it just did it direct.