Is the Fed becoming the president’s piggy bank of choice?
The American public doesn’t have much appetite for monetary matters, and most of that limited attention has been riveted on the political fights over President Donald Trump’s controversial nominees to the Federal Reserve Board. But there’s a far more serious piece of news on the Fed front.
That “new normal,” which the Fed adopted during the financial crisis, includes novel methods for controlling interest rates. During the crisis, those methods allowed the Fed to engage in “quantitative easing,” meaning large-scale purchases of government bonds and other securities.
These two new policies left banks holding more than $2.5 trillion in reserves and quadrupling the overall size of the Fed’s assets. In the past, such a large increase in bank reserves would have led to high inflation. But the Fed could now avoid that result simply by making sure the rate it paid banks stayed high enough to get them to hoard any reserves the Fed created.
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