...against fictions and other tall tales

Thursday, 21 April 2011

St. Louis Fed knows about...the Fed's policy of paying interest on reserves

In a previous post, I criticized the research staff of the St. Louis Fed for failing to explain in an article on the expansion in the US monetary base that the Fed now has the ability to simultaneously defend against inflation and maintain large amounts of excess reserves (contrary to what most macro textbooks claim).

Well, it turns out that someone at the St. Louis Fed is actually aware of the Fed's new policy of paying interest on reserves (see p.2). As mentioned in my commentary, the payment of interest on reserves nullifies a central monetarist tenet which holds that all increases in the monetary base are inflationary by nature. Perhaps someone at the regional Fed realized that their position on this matter was inconsistent and needed to be clarified. Still, it seems pretty clear that the piece by Wen was aimed at (incorrectly) inciting fear about the potential for inflation caused by the expansion in the US monetary base since 2008.

Also, just to clarify my view on this issue, the reason why I wish to highlight the fact that the Fed now has the ability to both control inflation (via the setting of interest rates) and maintain a large monetary base (via the remuneration rate on reserves) is not to support QE as a policy objective. As I've made clear previously, I have serious doubts about the effectiveness of QE as a means to get the US economy back on track. Rather, my goal is to show that, in the event that the US government decides to pursue additional stimulus via fiscal policy (which I believe is needed), the Fed would have all the tools at its disposal to stabilize the benchmark rate, control inflationary pressures and accommodate for the excess bank reserves created as a result of the additional deficit spending by the US Treasury.

h/t: Cullen Roche

1 comment:

  1. You may want to interact with Quiggin on MMT. I think he's looking for a good sparring partner.