In December 2008, the Federal Open Market Committee voted unanimously to lower interest rates in the interbank lending market from 1 percent to a range of 0 to 0.25 percent. At their most recent meeting in March, committee members reiterated this decision and added that "this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6 percent."
The Federal Reserve has traditionally used what is called "open market operations" to manipulate interest rates and influence lending activity. But more than four years later it's clear that low interest rates do not necessarily bring about the high level of investment and consumption that policymakers want.
When it first took the rates to zero, the Fed expected to create big incentives for more borrowing and, in turn, more economic activity. Obviously, monetary policy incentives don't work as well as committees think they do.
A big problem for the Fed is that no matter what it does with interest rates, it needs our help. That is, monetary policymakers can manipulate the stock of money available, but they need action in the banking system to actually create more money.
Since 2008 the money stock - what is available to banks because of Fed actions - has increased dramatically, but the quantity of money supplied by banks to the market has changed little.
There is a lot of money available; it is just not being used.
In economics the money supply is a line or curve showing the entire quantity of money offered to others at associated interest rates. This table or graph would show the quantities of money circulating within an economy for any given interest rate.
There are many things we can use for money, including currency and our debit cards.
The most basic measure of money is called M2 and consists of circulating currency (including what banks hold in their vaults), traveler's checks, checking accounts, savings deposits and balances in non-IRA money market mutual funds.
Since 2008, M2 has grown at an average annual rate of 6.6 percent. From 1960 to 2008 the average annual rate of growth in this measure of the money supply was 7 percent.
Despite the Fed's efforts, banks continue to hoard cash - holding more reserves than required by regulators and not lending much. Consumers and investors also are not helping out - they're leaving their money in cash and short-term bank accounts.
Total reserves at U.S. banks are currently higher than $1.8 trillion, of which $1.6 trillion is in excess of required reserves. This is double the $767 billion in excess reserves at the end of 2008. Before the crisis, banks kept less than $2 billion in reserves above that required by law.
Idaho banks exemplify this trend. Home Federal Bank of Nampa, for example, currently has about 11 percent of its assets in cash and cash equivalents, compared with only 4 percent in 2008.
The Fed has tried to sidestep this problem by going past the banks themselves. Since the financial crisis, the Fed has lent directly to the government and to the public through the purchase of U.S. Treasury and mortgage-backed bonds.
The Fed now owns more than $3.1 trillion worth of these assets, compared with $927 billion in October 2008.
There's no more rope for the Fed. The work is done and everyone can take a nice spring vacation.