David Kirkpatrick

December 18, 2008

The Fed’s toolbox …

Filed under: Business, Politics — Tags: , , , , , — David Kirkpatrick @ 2:57 pm

isn’t totally empty, even though the overnight funds rate is now effectively zero. Of course, we can always just the printing presses running 24/7 at the mint. (Before I get it from other fiscal conservatives, just kidding there on the last one.)

From the link:

When the Federal Reserve reduced its target for the federal funds rate to virtually zero this week, it appeared to have run out of room to attempt any further monetary stimulus for the economy.

That’s not really the case, and it is why the Fed statement stressed the wide-ranging open market operations it will use to inject money into the economy and drive down interest rates along the entire interest-rate curve, not just at the short end. The Fed will directly buy mortgages to flood that market with much-needed liquidity, and it will buy long-term Treasury bonds to drive down yields.

But just as the absence of interbank lending has rendered the federal funds target fairly useless as a tool, so too has it robbed central bank money of much of its impact, because there is no multiplier effect. That whole credit mechanism is broken for the time being, which means central bank money is going into the economy directly, without the amplification of bank lending on the basis of fractional reserves.

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