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>> "An instrument is a very different concept from an indicator" You are right there. >>"The Fed wants to keep the price level on a stable trajectory, and the
by RobertoG 6y ago
>> "An instrument is a very different concept from an indicator"
You are right there.
>>"The Fed wants to keep the price level on a stable trajectory, and they use an interest rate target as an intermediate instrument to do so."
Yes, they use it like the main instrument to do so. And that's the reason why they can't just allow the interest rate to float freely. And because they can't allow the interest rate to float freely they have to add reserves when the inter-bank market is going up. So, reserves will be added to the system when banks need them.
Causality: banks lend -> reserves are added
- eru 6y agoUsing interest rates as a policy instrument is a decision they make. Technically, It would be rather easy for them to change that decision and eg just buy and sell t-bills directly without any reference to interest rates. They can easily choose to let interest rates float freely. Of course, even if they directed targeted eg the TIPS spread without worrying about interest rates, in the end they would still add reserves when banks lend. (Ceteris paribus.)