Sunday, March 15, 2020

How Does the Fed Distribute the Money It Prints?

Federal Reserve Bank of New York

A reader emails:
Does a chart at a specific site exist that shows the distribution of Federal Reserve funds to specific industries in specific amounts?  Or is the only way to tell which industries get Fed Funds is by price inflation in that industry? Thanks.

RW response:

The Fed doesn't distribute to specific economic sectors just to some banks, money market funds etc.

But the purchases (mostly of Treasury securities) by the Fed create reserves at the Federal Reserve for banks (money market funds deposit their payments recv'd with banks). The banks have two choices, they can keep the funds with the Fed as excess reserves or make loans against the reserves and thus increase the money supply.

Where the banks lend the money is where you see the first appreciation in prices.

This is how the traditional business cycle works but the current COVID-19 panic is different.

It has not occurred because of a tightening of Fed money printing, it is a healthcare panic. Thus when the panic subsides, the money will be there to bid up prices to previous levels and higher, since the Fed is doing everything it can to pump out more money.

Part of the reason there was fairly tame price inflation since the 2008 financial crisis is because productivity gains have been high. The COVID-19 panic is reversing these gains in productivity. Thus, when the panic subsides there is going to be more money chasing fewer goods and services.

But the most important thing to keep in mind is that this is not a shift from capital spending to consumer spending, which is at the heart of the business cycle.

It is just a panic collapse in spending. That is, once the panic subsides, people are going to go back to old practices, eating out, going to the movies, going to baseball games, whatever, but there is going to be much more money around at that time to bid up prices.


1 comment:

  1. To Hell with prepping for the Covid-19 virus...we need to prep for the extreme price-inflation that will eventually be with us.