Banking 15: More on the Fed Funds Rate

More on the mechanics of the Federal Funds rate and how it increases the money supply.

Category:

Education

Tags:

• federal
• reserve
• funds
• money
• suplly
• m0
• m1
• open
• market
• operations

[JackoWacko0087]

That line "i will SEE YOU in the next video" is becoming epic

[justpem]

Sal but does all this printing money to buy treasury bonds generate any inflation problems?

[WilliamNaville]

you spent 9 minutes on this video explaining the past video :S

[IvanAndreevich]

..make more loans, while making all their outstanding loans LESS valuable in real terms. The net effect being ..what?

[rogersat]

@rogersat So your whole story falls apart.

[rogersat]

@rogersat And to reiterate, the money multiplier is a myth, so you have that totally wrong. It's archaic economics with a supremely wrong and primitive understanding of how banking works. Bank lending is not reserve constrained. It is only capital constrained. When banks want to lend and they find a creditworthy customer, they will lend. They will then go to the interbank market or the Fed, and they will find them. OMOs may be necessary. But the Fed has to supply them to maintain the FFR.

[rogersat]

@rogersat In other words, there are no discretionary OMOs, and they cannot be used to change the FFR.  They are only used to defend it. Of course, this changes in a regime where you have interest on reserves, where the IOR automatically sets the FFR.

[rogersat]

Sal, you are an incredibly smart guy, but you have this whole process wrong. The Fed does not change the FFR using OMOs, and the money multiplier is a myth. This is what the actual technical literature shows, both empirically and through logic. The Fed changes the FFR purely through announcements and it always supply reserves to meet demand (bank lending isn't reserve constrained). That's what it means to have a target FFR. Too many reserves drops the FFR to 0, and too few to the discount.

[coturnix19]

@notme98 Sure they deserve to lose it. Any nation deserve their rulers.

[juliusreea]

i dont understand whats the worth of treasury?

[notme98]

but when the fed prints money, although they are not directly stealing from your uncle, they are certainly stealing from everyone else who owns any dollar bills (or checking accounts specified in units of dollars). Inflation happens. The fed has increased its wealth without doing work, and people have lost wealth without deserving to lose its wealth.