The Fed’s New Operating Procedures

Open market operations are no longer the Fed’s primary method of moving aggregate demand. In the latest video from MRUniversity, Tyler explains the Fed’s new modus operandi.

Comments

Thanks Tyler. Another excellent economics tidbit video.

Like the MR vidoes, what the world really needs is a video on Gibson's law.

Actually Gibson's paradox. Apparently Gibson's law is that for every Phd there is an equal and opposite Phd. That's certainly true in economics!

Here is a long article on Stephen Wolfram, Mathematica, Python, etc. that is way above my simple understanding of the "scientific paper" but I thought Cowen et al. might find it interesting. https://www.theatlantic.com/science/archive/2018/04/the-scientific-paper-is-obsolete/556676/ Are academics concerned that the approach to research and, more importantly, the presentation of the research is understandable by only a very few? The article indicates that Wolfram decided to create Mathematica because he wanted to make research more accessible, but it seems to me that he/they are going in the opposite direction.

;;;; "Open market operations are no longer the Fed’s primary method of moving aggregate demand."

Fed is still unsure of its 'primary' procedures after a century+ in operation?

And just why is it Federal Reserve (or Federal Government) responsibility and Constitutional authority to 'move
aggregate demand' ?

Bonus question: why is there a subsidized market in stock buying but a restricted market in stock shorting?

In a sense all banks create 'aggregate demand' since they issue paper against their deposits. In fact lots of places create 'demand'. A casino creates demand by 'buying' currency and issuing chips to gamblers.

Constitutional Authority? I'd peg it to general welfare and / or an umbrella power as part of carrying out all it's other powers, esp. the power of the purse. Of course the Constitution doesn't mandate the Federal Reserve model. Congress could have a totally central bank or it could outsource purely to private banks. The Constitution doesn't really specify as it isn't really very sophisticated in terms of laying out how finance should work in the government.

I was hoping the Fed would just drop the pretense and start writing blank checks for the banks to fill in as they wish.

Fed "pretenses" have huge advantages to its fundamental existence and objectives. Economists like'em too.

"It is well enough that the people of the nation do not understand our banking and monetary system for, if they did, I believe there would be a revolution before tomorrow morning" -- Henry Ford, Sr

Except it isn't a pretense. The Fed purchases assets on the open market. When you sell your 3-month Bill, the buyer might be the Fed, or it might be an investor, or a firm with excess cash or a drug cartel...You don't know because the Fed buys it's assets the way anyone else buys assets, for whatever the best current price is on the market.

The advantage of this is that the Fed could turn around and pull cash out of the economy by simply selling assets the same way. Contrast this with the Fed just giving money to some bank or even a system where the Fed gives money to all Americans by wiring it to individualized accounts.

Also the Fed isn't really giving money to banks by buying assets anymore than it's giving money to you if you happen to sell something the moment the Fed is buying.

They add or subtract from the seigniorage tax.

When IOER is raised, guv gets less member banks get more by the same amount. The corridor, the size of the potential currency at risk is fixed, input streams and output streams are fixed by law. Hence, it has one single purpose, making sure the seigniorage stream insures government pays its interest charges.

Thank you nice content very informative for economy, thank you for sharing

Everybody drink!

Always good advice!

Interest on reserves seems to me to be quite unnecessary for the Fed to attain its objectives. The video suggests otherwise, without really addressing the question.

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