Tags: Antinolfi | Keister | Fed | rates

Fed Economists: Cutting Reserve Rates Won’t Boost Economy

Tuesday, 28 August 2012 11:44 AM

Calls for the Federal Reserve to cut interest rates on excess reserves financial institutions stash at the U.S. central bank have been growing, but such a policy won’t help the economy much, Fed economists say.

Banks draw a 0.25 percent interest rate on excess reserves they keep at the Fed, and calls to cut it to zero have been growing on the argument that if it earns no interest at all, banks would be more inclined to lend it out and spur recovery.

Logical thinking, but it won’t work in that the amount of bank reserves held at the Fed beyond required levels is not tied to demand but to other factors, Gaetano Antinolfi, a senior economist with the Fed’s Board of Governors, and Todd Keister, assistant vice president in the New York Fed’s research and statistics group, wrote in a blog for the Federal Reserve Bank of New York.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

The size of the Fed’s overall securities holdings, loans and other assets determines the broader money supply and, ultimately, how much banks stash in excess reserves, they said.

“[L]owering this interest rate to zero (or even slightly below zero) is unlikely to induce banks, firms or households to start holding large quantities of currency,” Antinolfi and Keister wrote.

“It follows, therefore, that lowering the interest rate paid on excess reserves will not have any meaningful effect on the quantity of balances banks hold on deposit at the Fed.”

Banks are keeping an estimated $1.6 trillion in excess reserves in Fed accounts.

Other Fed officials say the Fed has done all it can to spur recovery.

On top of cutting interest rates to near zero, the Fed has purchased trillions of dollars worth of Treasury holdings and mortgage-backed securities from banks, a monetary policy tool known as quantitative easing that pumps liquidity into the financial system and drives down interest rates to encourage investing and hiring.

While past measures have pumped up stock prices and kept the economy on life support, it’s time for the country to move along on its own two feet.

“There are a lot of people overestimating the extent to which monetary policy is capable of having any sustained effect on growth or labor markets,” Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said recently, according to The Associated Press.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

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Tuesday, 28 August 2012 11:44 AM
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