Edward Lotterman: What you should know about what the Fed just did | Edward Lotterman's columns | Idaho Statesman
The Federal Reserve's Open Market Committee met last week and decided to let its most recent monetary easing program end as scheduled. Chairman Ben Bernanke also held a news conference where he took questions from reporters on Fed policy.
This was a first, although it continues a trend toward openness begun some 20 years ago. On the whole, both actions were good, although the jury may stay out for decades on the prudence of ending the latest monetary expansion program. (If it had decided the other way, the jury would also remain out.)
One intractable problem from the point of view of the public’s understanding of the Federal Reserve is that the variable over which the Fed actually has some control — the money supply — is difficult to understand. Thus the media, and sometimes the Fed itself, describe policy changes in terms of their effects on a secondary variable, interest rates. This causes confusion.
The problem is even deeper because the Fed’s control over the money supply is not direct. All it can do with any precision is change something called bank reserves. These are deposits in banks that are not loaned out or invested in bonds. Some reserves are required by law. Holding reserves beyond this is a management decision of the bank. [...]
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Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.
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