The Fed Speaks: Will Its Policy Be Effective?

By at 30 April, 2020, 3:28 pm

by Raymond J. Keating-

According to the Federal Open Market Committee statement released on Wednesday (April 29) afternoon, the Fed unsurprisingly left the federal funds rate at 0%-0.25%.

And it was noted, “The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Again, no surprises here.

In terms of the effect of Fed policy, however, there long have been serious questions. Indeed, it’s hard to see how the massive expansion in the monetary base (currency plus bank reserves) during the 2008-09 meltdown and the subsequent recovery/expansion period made any real difference to the economy. As SBE Council has pointed out before, the expansion of the monetary base overwhelmingly fed never-seen-before increases in bank reserves, while we suffered through a deep recession and poor recovery.

During the current crisis, the same phenomenon largely is occurring. That is, from the two weeks ending February 20 to the two weeks ending April 22, the monetary base was increased by a breathtaking $1.46 trillion, while reserves expanded by $1.3 trillion. Hmmm.

Indeed, the Fed has provided staggering levels of liquidity not only in recent weeks but since the summer of 2008 – far beyond anything that possibly could have been needed or had been previously imagined – and the results have been, at best, ineffectual.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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