Why isn't the Fed raising the reserve rate (apparently it was set to 0 in 2020[1]) to reduce commercial banks creating new money?
[1] https://www.investopedia.com/terms/b/bank-reserve.asp#citati...
The Fed is doing exactly that: https://fred.stlouisfed.org/series/FEDFUNDS
Ah thankyou, do you think it will spike anything like it did in the 80s?
[edit: I see she discusses this in article as well, now]
Predicting the future is always difficult, there are elements of now that are similar to the past, and there are elements that are different. It also helps to have experienced those past events and been able to learn lessons from them.
It seems highly likely that inflation will remain at its current elevated level for at least another 12 months, beyond that horizon, the trajectory will be determined by what happens between now and then.
Re:
by imtringued on Saturday October 29, 2022 @10:00AM
(#33384109)
That's a better idea than raising interest rates but it has the downside that banks are so fragile nowadays that any raise in the reserve requirement could cause a chain of bankruptcies.
The problem is a situation of run-away inflation can arise. This happens because the vast majority of the money supply is created by commercial banks lending activities (not central bank reserves as many seem to believe) - i.e. whenever any commercial bank lends, it creates new money.
When inflation goes up sharply, real interest rates can become sharply negative (as they are presently), and this provides an incentive to borrow money at negative real rates, where you profit by not having to repay as much in the future as you borrowed in real terms. This borrowing/lending activity itself then serves to further increase the money supply, until such time as interest rates are raised sufficiently so as to bring the (expected) real interest rate back into positive territory, thereby removing the profit incentive that drives marginal money creation.