If I am interpreting your reply correctly, it is basically that the Fed is constrained legally or politically from taking the kind of drastic actions that would clearly push NGDP up or down. I think implicitly you also have some model in mind in which the Fed’s impact on NGDP is highly nonlinear: Fed can either accept the status quo (the Fed looks impotent), cause a depression, or cause hyperinflation, but nothing in between. I am curious as to what makes a model of the economy work like that.

You cite Arnold’s, “I think of the Fed as a bank … profits …[and later] … losses …” depiction of the Fed.

You then state, “That is historically true.”

I have to say that Arnold’s depiction/characterization of the Fed in this way is not only not true, it hasn’t ever been true. Arnold’s depiction of the Fed is a rather gross non sequitur – a complete logical fallacy.

How could the accountancy concepts of “profit” and/or “loss” possibly apply or even be relevant to the Fed – the one sole entity in the universe that has the pre-existing statutory authority to “print/create” money?

I apologize to you in advance if this comment seems to be picking on, or criticizing, you. I don’t have that intent at all.

This is historically true.

However, this is not an accurate description of Fed activity in the post-2008 ZIRP model, in which excess reserves have played a major role and a much more important role than required reserves.

Since 2008 the Fed’s monetary expansion, designed to help liquify credit markets and avoid deflation, has been “pushing on a string” i.e. confronting stubborn declines in velocity as a combination of slack loan demand, post-crisis bank conservatism, regulatory pressures on solvency/capital ratios, and interest paid on reserves have caused banks to effectively sterilize the feds quantitative easing by maintaining burgeoning balances of reserves.

The Fed, in order to maintain a positive floor on nominal interest rates (and later, I think, with the motive of sterilizing quantitative easing which was really intended to skew credit allocation and generate wealth effects), began paying interest on excess reserves in October of 2008 and has done so ever since. How they will treat excess reserves as they raise short rates (an operation fraught at this time with the risks of intensifying flows out of EM-funding carry trades and into the Dolllar with exchange rate effects problematic on both sides) is an interesting question.

If they don’t keep interest on reserves competitive with short rates and they don’t raise the level of required reserves then excess reserves will drain out of the Fed system with monetary and/or short-rate issues (via re-establishing fractional reserve multipliers on hitherto reserves and/or bank’s substitution purchases of short paper e.g. t-bills driving short rates below Fed target) as well as credit allocation and fiscal implications (the latter two via the Fed’s sales of treasuries/agencies and concomitant back-up in yields). If the Fed does keep paying interest on large amounts of (excess) reserves in-line with rising short rates or raise required reserves to high levels (while continuing to pay interest on reserves) they will be making massive and politically unpalatable amounts of money to primary dealers depositing at the Fed.

There is another problem with activist monetary policy. At some point the bank’s book will become so large it will influence the market. We had this once. It was called LTCM. It failed. So too will activist monetary policy.

Or more generally: “the kind of money that every other kind of money promises to be redeemable in. The kind of money that serves as a unit of account”