Now, the primary tool for conducting monetary policy is the interest rate that the Federal Reserve pays for excess reserves. That interest rate will shape the desire of Federal Home Loan Banks to lend funds and the desire of foreign banking organizations to borrow them–and thus affect the federal funds interest rate.
This description should help to clarify why the federal funds interest rate will never exceed the interest rate on excess reserves paid by the Fed: The foreign banking organizations that are now the main borrowers in the federal funds market are receiving that interest rate on excess reserves, and they will only be willing to borrow at slightly lower interest rate.
So commercial banks don’t even factor in to the Fed Funds market any more. George Selgin has more discussion.
I would suggest not thinking of the Fed as a monetary authority. Instead, think of it as a large bank used by the government to allocate credit, especially to itself. I think that explains the opacity of Fed operating procedures.
After Bretton Woods the U.S. dollar became the de facto world currency. Perhaps more thought should be given to the repercussions of this choice.
My take is the orthodox macroeconomics profession has been wrong on several of the big issues of the day.
When was that a tight-money money policy was absolutely necessary. In retrospect, all tight money accomplished was to choke off growth.
The second is that what was called free trade was somehow good for the US economy and the employee class. My take is that large current-account trade deficits have had very bad results.
A third schism between orthodox macroeconomics and reality is the sacralization of immigration, without concern for what large-scale immigration does to employees.
And fourth, orthodox macroeconomists, while barking up the free-trade tree, left un-hunted the damage done by property zoning and the related decline in living standards.
“When was that a tight-money money policy was absolutely necessary. In retrospect, all tight money accomplished was to choke off growth.”
What is the definition here for recognizing tight money?
Good question. I would like to know myself, except that for many, money always and everywhere should be tighter than it is now. Charles Plosser, former Federal Reserve Board member, rhapsodized about obtaining a negative 1% rate of inflation.
My own guess is that a 3% rate of inflation is probably about right for maximizing real output.
Tight money means the currency banker is talking a smaller market risk. In the minimalist theory currency bankers take a constant market risk always so agent equilibrate about a known uncertainty.
Central bankers share market risk with government. In that case the concept of tight money is not well defined.
To me it looks like the Federal reserve plus all the USA banks are 1 huge bank that has management that poorly oversees it’s subsidiaries.
I think this is right, to the extent we have globalised Capital markets and money is a fungible commodity.
Ergo, there is one large global pool of capital, with various central banks, including the Federal Reserve, the ECB, the Bank of Japan, the People’s Bank of China, and sometimes the Swiss National Bank and the Bank of England, adding to the capital pool.
When the Federal Reserve tries to stimulate the US economy by lowering interest rates and easing capital, it is like trying to inflate a balloon by lowering worldwide atmospheric pressure.
By deduction, federal deficit spending or helicopter drops are the necessary policies in this era. However, this issue is politicized, like all issues.
The Fed is losing market share in the domestic economy because they imposed an actual and an implied federal transaction tax on money usage.
As monopsony the Fed does indeed have a variable market share in the currency markets.. Their lose of market share is not directly visible in dollars. But it becomes a spiral down because taxes are always lower than expected due to lose of market share.
When the Bank of England was created, its explicit function was to allocate credit to the government.