Monetary policy is set by interest rates and money supply. The Federal Reserve can slow the economy by raising interest rates, and/or by decreasing the money supply. They enliven the economy by doing the opposite.
Does anyone know if they always use both tools to move the economy? If the Fed wants to slow economic growth, do they always raise interest rates AND lower the money supply? (Do they lower money supply by issuing fewer bonds or by tightening bank reserves?)
I’ve been wondering if the Federal Reserve is testing a way to have their cake and eat it too. They’ve been raising interest rates to slow the economy, but for all we know, they are printing tons of money at the same time, hoping that the increased liquidity will make up for the higher interest rates and keep the economy growing.
On the one hand, they raise interest rates and go along with the OCC’s lending guidelines to slow housing and the economy, but on the other hand they print money like mad to keep liquidity in the stock market and keep the economy going.
Yes, it sounds like a good theory, and they will do all those things depending on where they face the least pressure. But what happens if the dollar drops under 80 and all commodities will end their correction and have another run? Then the government will suddenly not do much of any of those things. Partly, because then people don’t want them to do anything except keep prices down. And you can’t keep prices down by printing money.
Inflation is tamed, but if they are not printing money, then why stop calculating and publishing M3?
RE: commodities. It makes sense, as Zeal says, that commodities will be in high demand, as 3-6 bil people in Asia want an American lifestyle. How dependent are they on the American consumer? Can the Asian countries grow while the US is in a recession? They could not grow in 2000, and they can’t grow today, but can they grow without us in a few years? What is the effect of China printing so much yen, and isn’t that causing inflation?
(Primer: Chinese suppliers are paid by the U.S. in dollars, take the dollars to their bank to convert it to yen, and the Chinese bank has to print enough yen to cover the dollars they were given, to prevent their currency from appreciating. So the Chinese bank ends up with every dollar that we send to China for buying goods. The bank invests those dollars they got from their customers, into U.S. Treasuries, bonds, MBS, equities.)
I think regardless of quoted CPI numbers, most people agree that prices have doubled in the last ten years (gasoline, electricity, rents/houses, healthcare, education). That’s a 7.2% annual increase during a time of supposedly low inflation. Sure, some items have gone down, e.g. produced in China, but their quality, too. Computers have gone down a lot, but I am not using it for much more than I already did in 1996 when I got internet through Time Warner Cable. Rather I am upset, that I need a new computer every two years, because the software cloggs up everything, and it wastes more of my time.
So, going forward it might be more than a 7.2% per year increase. In another ten years, everyone would have to use his net salary to cover the rent, if incomes continue to lag. Denial or not, it can’t continue that long before nobody won’t be buying anything anymore. (The cornerstone of the US economy)
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