Ricardo Cabral_

Fed Facing a 'Money Trap'

Flow5, thanks for the comments
I believe comparisons with 2007 are more informative than comparisons with 2006. Growth in currency held by the non-bank public has been just 1% between Feb 2007 and Feb 2008. M1 growth has been 0% and Demand and other checkable deposits have fallen by 1.3% although the retail sweeps program (RSP), which has transferred around $30-$35bn per year in the last few years, explains this fall. Growth in legal reserves was 0.3% in the period.

Nonetheless, you are correct in arguing that the changes in the reserve requirements make it difficult interpret whether the Fed is following a restrictive or easy monetary policy. If we define M1’=M1+RSP (this is a somewhat questionable comparison to do since people might have used their transaction deposits differently than did, had the RSP not existed), then M1’ has been growing at a rate below 2% since 2006, and with a monthly average slightly under 1% in the last twelve months, well under the inflation rate. The Fed has also reduced the rate of nominal monetary base growth to just 1.1% year-on-year as of Feb 2008 (from 2% in Feb 2007 and 4.3% in Feb 2006), meaning negative real monetary base growth. So, according to these measures, the Fed’s monetary policy has been restrictive. M2 growth, on the other hand, has accelerated to a 6.9% annual rate in February. Thus, one could also argue, as you seem to suggest, that such growth rate represents “easy” monetary policy and continuing trust in the banking system, contrary to what I argue in my article. But I may expand on this issue in a forthcoming post.

Different schools of thought (e.g., monetarists) may argue that it’s impossible to conduct monetary policy using interest rates targets. However, the use of interest rate targets to conduct monetary policy is explicitly stated by the Fed (see www.frbsf.org/publicat...) and the Bank of Canada (see www.bankofcanada.ca/en... ), for example.



Uncle Billy:

The numbers are available from H.4.1. Release (www.federalreserve.gov.../). I don’t think the M3 numbers can be so easily collected, otherwise somebody would already have posted them on the internet.