Friday, August 15, 2008

Chicago Fed President: The Fed Funds Policy Lever Is Broken

Federal Reserve Bank of Chicago President Charles Evans gets it.

We have been pointing out for some time that despite Fed Funds at 2%, the money supply is not growing to any noticeable degree. Evan is the first Fed official to comment on the current lack of monetary growth despite the low Fed Funds rate. In a speech today in Bloomington, Illinois before the McLean County Chamber of Commerce, Evans said:

Even though I think the current 2 percent funds rate is accommodative, it is not especially stimulative. This is because the financial market turmoil has meant that our funds rate reductions have led to less credit expansion to households and businesses than typically would be the case. Indeed, it has become increasingly clear to me that the fed funds rate alone is neither an adequate nor even an entirely appropriate tool for addressing instability in the financial markets.

Will the Fed stop sterilizing its bailout operations? That will goose the money supply. Stay tuned.

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