Allison Kraus says “You say it best, when you say nothing at all.” Monetary policy makers can learn a lot from this country song.
In 2008, policy makers at the central bank of the United States, the Federal Reserve, voted unanimously to lower interest rates in the interbank lending market from 1 percent to 0 percent. At their most recent meeting in March, committee members reiterated that “monetary policy remains accommodative.” That is, low interest rates are still in place with the hope they will support “improvements” in economic conditions.
A big problem for the Fed is that no matter what it does with interest rates, it needs our help. You can manipulate bank interest rates all you want, but it takes real action in the banking system to actually create more money and economic activity.
Since 2008 the money stock — cash from the Fed available to banks — has increased dramatically, but the quantity of money supplied to consumers and businesses has grown slowly. Despite the Fed’s efforts, banks continue to hold lots of cash, keeping more reserves than required by regulators and not lending much. Consumers and investors are not helping, leaving their money in cash or short-term bank accounts.
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Total reserves at U.S. banks are $2.5 trillion, of which $2.3 trillion is in excess of required reserves. Before the recession of 2008, U.S. banks never kept more than $2 billion in reserves above what the law requires.
Idaho banks exemplify this trend. According to data from the Federal Deposit Insurance Corp., banks in Idaho hold 13.5 percent of their assets in cash and cash equivalents. That compares with only 4 percent in 2008.
There is a lot of money available. It is just not being used.
Since low interest rates have not spurred us all to borrow and spend, policy makers are resorting to “talking up” the economy. In speech after speech, before many groups, central bankers make pronouncements about improving labor and housing market conditions. They say they will continue to do “whatever it takes” to make the economy grow fast.
However, multiply speeches have the tendency to create more uncertainty in the financial markets, particularly when these same policy makers don’t all agree on just how well the economy is doing. Since the recession of 2008, the Fed has sought to calm financial markets by discussing interest rates more frequently. Perhaps all this talking has just made matters worse.
The Fed should not only stop manipulating interest rates, it should say nothing at all.