But you're right that it doesn't give them much monetary room--I guess if/when the downturn comes resorting to fiscal stimulus be the only answer. Not that the GOP deficit chickenhawks have given any room there: remember when GOP was against deficits? US$ 1T later Pepperidge Farms remembers.
potentially, negative interest rates, that’s what [1]
[1] https://www.investopedia.com/articles/investing/070915/how-n...
I assume you meant “raise” instead of “cut” here.
If so, you are correct, and the question about what the fed does when the market corrects/crashes is why a lot of folks are wringing their hands right now.
Though inflation had remained low, so it's not clear that it was necessary to raise rates.
If you doubt the official numbers, the Billion Prices Project goes out scrapes price data, and it matched pretty well with the CPI:
No, even if the acheivable aggregate real expansionary impact of monetary policy were unbounded (which no one argues it is) we wouldn't all be rich because monetary policy also has a distributional impact. But, more to the point, having bounded real impact isn't the same as zero real impact.
Increasing the money supply is effectively a transfer of wealth from people who own/lend currency to people who owe/borrow it. It doesn't come without cost. It's effectively taxing one group and giving the money to another.
As for stimulating the economy, it works as long as the borrowers are making better use of the money than the lenders would have. In a time when you may need to e.g. build new factories somewhere else because existing ones are unavailable, that becomes more true than it was the day before, because the people who want to build new factories need money to do it and now that money is cheaper to get.
What it does is increase borrowing. All borrowing is really borrowing from the future, because at some point the money has to paid back. (Or have interest paid on it forever, which is effectively the same thing.) So what you get now you have to give back later, but that may be a beneficial transaction if you need it more now when some disruption is occurring than you would years from now after things have calmed down.
But only in the short term, since lenders will catch on and increase their interest rates to offset the inflation. As you said, you're transferring wealth from lenders to borrowers, which means a larger incentive will be needed to induce anyone (other than the Fed) to lend money. To maintain the effect you would not only need to maintain the inflation but also continually increase the rate of inflation to exceed expectations. That's a quick route to hyperinflation and worthless currency.
The Fed can keep lending at arbitrarily low rates long after every other lender has been driven from the market because they're "lending" newly minted currency at essentially zero cost, and moreover don't particularly care whether they make a profit. However, even they can't sustain ever-increasing rates of inflation without destroying all confidence in their own currency, and it's pretty hard on the other lenders. ("Lenders" including anyone with a savings account, or with a significant fraction of their net worth in currency rather than inflation-proof assets and other investments; the poor are thus hit harder than the rich.)
> ... the people who want to build new factories need money to do it ...
That's an over-simplification. The people who want to build new factories need materials and labor to do it, not money. Giving them more money doesn't increase the amount of material or labor available, though it may allow them to claim a larger share of the available goods provided they do so before the inflation becomes generally known and devaluation takes effect. Naturally, if they're getting a larger share then others are making do with less. It only works out to a net benefit under the assumption that you know how those goods should be put to work better than the people directly involved—despite apparently being unable to persuade people that your plan is better rather than resorting to underhanded tricks.
No, because the reason you lower interest rate targets are exactly the conditions which provide lower returns on alternative investments besides lending. You can only afford to raise rates for lending if you've got something better to do with the money.
A borrower can only afford to pay higher rates if they have something better to do with the money. Lenders can always afford to raise rates, as doing so increases their profit margin. The limiting factor there is competition from other lenders, but a factor like inflation affects all lenders equally. What they can't afford is lower profits in real, fixed-dollar terms due to inflation. Lower profits on lending => less money available for lending => higher prices (interest rates) for the remaining supply.
No, because lowering interest rates by 0.5% generally doesn't cause inflation to increase by 0.5%.
Moreover, most of the inflation from lower interest rates happens immediately. If you lower interest rates people borrow more money which causes some inflation, but to cause even more inflation people would need to borrow even more money, which they wouldn't do unless you lowered interest rates even further.
The level of outstanding debt (i.e. the money supply) goes up and then stays there until interest rates go back down and give people incentive to pay it back.
> As you said, you're transferring wealth from lenders to borrowers, which means a larger incentive will be needed to induce anyone (other than the Fed) to lend money.
Banks can borrow money from the Fed and lend it to other people. Also, when you lower interest rates it lowers the returns on everything else because people borrow money and use it to bid up securities, and then the now-smaller returns from issuing loans remain relatively attractive.
Notice that the US has had near-zero interest rates for over a decade and there isn't anything even resembling hyperinflation. But there is a whole lot more outstanding debt than there was when interest rates were higher.
> Giving them more money doesn't increase the amount of material or labor available
Sure it does, in the sense that available means in productive use rather than merely having physical existence.
If you pay people more they'll spend more time working and less time watching TV. They'll dig minerals out of the ground to make stuff with instead of leaving them in the ground. There is a difference between having something and doing something with it.
> It only works out to a net benefit under the assumption that you know how those goods should be put to work better than the people directly involved—despite apparently being unable to persuade people that your plan is better rather than resorting to underhanded tricks.
The entire premise of lending money is based on this being true. It's the assumption that some people have good ideas but not capital to fund them.
There are plenty of ideas that you can expect to turn $100,000 this year into $105,000 next year. If interest rates are at 4% they're viable, if they're at 6% they're not. Lowering interest rates makes more of those things viable.
It's not a matter of persuasiveness, it's a matter of transaction costs. Alice wants to start a company. She could borrow money and use it to pay salaries -- which is only possible if she can borrow at a sufficiently low interest rate. Or she could pursuade the workers to work all this year and not get paid until next year (when they'll get paid with interest). But then the workers would have to convince their landlords to let them live in their apartments without paying rent for a year, and the landlords would have to convince the government to let them defer paying property tax for a year, and the government would have to persuade the teachers to teach without pay for a year and so on.
Obviously borrowing the money from a bank is a lot more realistic.
100 Trillion Dollar bill anyone?
There is no argument that cannot or does not have long-term effects, and no we would not all be incredibly rich, as it absolutely costs something to increase to money supply.
When you increase the money supply you devalue each and every current piece of money in existence. Money (fiat) can be infinite but what you buy with it is not.
>Every underdeveloped nation would simply increase their money supply and poverty would end for ever.
No, it wouldn't. Have you heard of hyperinflation? A gallong of milk would simply cost $1000 dollars. Kind of like how milk used to cost 5 cents a gallon 50 years ago. The countries that do try what you are talking about, and there are plenty of examples, amazingly, all end up incredibly poor and economically devastated.
The argument that monetary policy cannot affect the real world economy is more about its limitations, where it cannot really make up for something like a months long interruption to international trade because the world's leading manufacturing nation has quarantined half its population.
The best it could to benefit the long term, I would think, is to make credit more available and cheaper to make it easier for companies and governments to weather the storm with minimal damage.
For example: who is going to outcompete American Airlines/United/Delta if all international flights are grounded or flight restrictions get worse?
Why would we care how robust our businesses are to such a rare event if we can mitigate it in other ways? You think it would be better to lose those businesses just for the chance at something better replacing them, just to avoid resorting to those mitigations?
Fiscal policy (e.g. the government buying tanks) absolutely affects the real economy.
The central bank doesn't control fiscal policy. It controls monetary policy. Monetary policy also affects the real economy, just indirectly.