Re:The ballooning money supply may be the key to unlocking i...
by RobertoG on Tuesday October 13, 2020 @05:55PM
(#24770782)
>>"Someone who was not considering borrowing money at 4% may change their mind at 2.5%."
We agree: when the interest rate arrive down to zero there is nothing more than the central bank can do to stimulate the economy. They could add infinite reserves to the economy and nothing would happen, because, obviously, the private sector is not interested in investment. Monetary policy is a blunt instrument.
Generally correct, but it should be noted that if a bank has a lot of reserves, and the over-night lending market is cheap, that means the bank has access to 'cheap money' on the 'wholesale' end of things.
So if a retail bank can get 'cash' cheaply, it can lower its interest rates to its 'retail' customers (mortgages, business loans, etc).
If a bank wants (say) at least a 2% spread between its wholesale source of money/reserves and what it gives out to the real economy, then the Fed raising liquidity such that the over-night rates go from (e.g.) 2% to 0.5%, that means banks can drop their public facing rates as well.
Someone who was not considering borrowing money at 4% may change their mind at 2.5%.