Sunday, May 31, 2020

Interest on Excess Reserves and the Prospects for Price Inflation

Kevin emails:
I’m not sure if you have addressed this recently, and I apologize if you have and I missed it.  I’m curious about the current Fed policy regarding Interest on Excess Reserves (IOER).  What is their current policy and how might that policy interact with coming inflation expectations?
RW response:

The Federal Reserve Board reduced reserve requirement ratios to zero percent effective March 26, 2020.  This action eliminated reserve requirements for all depository institutions.

IOER has a negligible role in money supply creation with this change. Bank capital requirements, etc. are much more important but it really doesn't make sense except for a Fed watcher nerd to pay attention to these details. It is wading into the deep weeds for no reason.

Just watch money supply growth and that will give you plenty of guidance as to the pressures on price inflation.

And right now, they are enormous. Thirteen-week annualized money supply growth. the way I calculate it (detailed in The Fed Flunks), is now growing at a remarkable 40.5%.

The pink line above shows current money supply growth. The other lines show growth for the 8 previous years. Obviously, we are not in Kansas anymore.

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