4 ms·

100% + I'd expand by saying the Fed uses its operations to control the price of money, which is interest rates, not the supply of money. The supply of money has

100% + I'd expand by saying the Fed uses its operations to control the price of money, which is interest rates, not the supply of money. The supply of money has many factors such as how many loans are created, etc. Taxes paid. etc beyond the Feds operational control.

jnwatson 4y ago
That’s a rather pedantic interpretation. Yes the Fed doesn’t run the printing press, and it doesn’t set M1, but it controls the levers. That’s like saying to the police officer: “I didn’t speed, I merely pressed on this pedal that’s connected to a rod that opened a valve providing more fuel to the engine that’s connected to the wheels”.
- CraigJPerry 4y ago
  How does the fed control the levers? Customer approaches commercial bank for a loan, bank assesses credit worthiness[1] and choses to make the loan. New money was “printed” into the economy. What levers did the fed pull? Also what function does the fed have in the tax part the GP mentioned? [1] the bank has other depts looking at capitalisation constraints, another dept managing day to day operations of the reserve account, perhaps another dept managing funding sources etc. but the loan making function doesn’t consult them before creating new money to make the loan
  - jnwatson 4y ago
    The most obvious, direct lever is they set the reserve requirement ratio. The bank isn't going to make the loan if they don't have the reserve. The next mechanism is setting the Fed funds rate and discount rate. That will very directly incentivize the bank to loan more or less money. The third is the ability to buy whatever asset it deems necessary to support the economy. Quantitative easing almost directly impacts money supply.
    - CraigJPerry 4y ago
      >> they set the reserve requirement ratio No that doesn't exist anymore: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm >> The bank isn't going to make the loan if they don't have the reserve The bank has unlimited reserves since the central bank will issue reserves via the discount window in unlimited quantities. Loan making is capital constrained, not reserve (or deposit!) constrained. >> That will very directly incentivize the bank to loan more or less money No. This is ignoring what's happened over the past 14 years. >> Quantitative easing almost directly impacts money supply Again - this is a statement that isn't supported by what we've seen happen since the GFC.
    - bubbleRefuge 4y ago
      reserve requirements are based on deposits/liabilities. Capital requirements are what allows or disallows a bank from making loans.
    - HWR_14 4y ago
      Capital requirements (which is what Silvergate ran afoul of) have replaced reserve requirements. They function similarly, only instead of the amount of loans being determined by deposits they are determined by shareholder equity.
- bubbleRefuge 4y ago
  The Fed logically cannot target both monetary aggregates and interest rate levels at the same time. Its impossible by definition. They operate interest rate policy by buying and selling assets (treasuries and Interest on reserve accounts) in order to hit a target. These operations affect monetary aggregates.

jnwatson 4y ago

That’s a rather pedantic interpretation. Yes the Fed doesn’t run the printing press, and it doesn’t set M1, but it controls the levers. That’s like saying to the police officer: “I didn’t speed, I merely pressed on this pedal that’s connected to a rod that opened a valve providing more fuel to the engine that’s connected to the wheels”.

CraigJPerry 4y ago
How does the fed control the levers? Customer approaches commercial bank for a loan, bank assesses credit worthiness[1] and choses to make the loan. New money was “printed” into the economy. What levers did the fed pull? Also what function does the fed have in the tax part the GP mentioned? [1] the bank has other depts looking at capitalisation constraints, another dept managing day to day operations of the reserve account, perhaps another dept managing funding sources etc. but the loan making function doesn’t consult them before creating new money to make the loan
- jnwatson 4y ago
  The most obvious, direct lever is they set the reserve requirement ratio. The bank isn't going to make the loan if they don't have the reserve. The next mechanism is setting the Fed funds rate and discount rate. That will very directly incentivize the bank to loan more or less money. The third is the ability to buy whatever asset it deems necessary to support the economy. Quantitative easing almost directly impacts money supply.
  - CraigJPerry 4y ago
    >> they set the reserve requirement ratio No that doesn't exist anymore: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm >> The bank isn't going to make the loan if they don't have the reserve The bank has unlimited reserves since the central bank will issue reserves via the discount window in unlimited quantities. Loan making is capital constrained, not reserve (or deposit!) constrained. >> That will very directly incentivize the bank to loan more or less money No. This is ignoring what's happened over the past 14 years. >> Quantitative easing almost directly impacts money supply Again - this is a statement that isn't supported by what we've seen happen since the GFC.
  - bubbleRefuge 4y ago
    reserve requirements are based on deposits/liabilities. Capital requirements are what allows or disallows a bank from making loans.
  - HWR_14 4y ago
    Capital requirements (which is what Silvergate ran afoul of) have replaced reserve requirements. They function similarly, only instead of the amount of loans being determined by deposits they are determined by shareholder equity.
bubbleRefuge 4y ago
The Fed logically cannot target both monetary aggregates and interest rate levels at the same time. Its impossible by definition. They operate interest rate policy by buying and selling assets (treasuries and Interest on reserve accounts) in order to hit a target. These operations affect monetary aggregates.