A Note on Federal Reserve Policy Incongruencies

William Carlson,Conway Lackman

doi:10.4236/me.2015.612116

Abstract

The incongruencies of Federal Reserve (Fed) policy is demonstrated where the Fed proposes to raise interest rates on excess reserves claiming that generally rising rates that follow will help households increase interest income. The resulting slowing of the economy, however, will cause slowing employment and income gains which are likely to more than offset any rising interest income.

Highlights

In a low visibility maneuver, the Federal Reserve (Fed) installed a policy to pay interest (IOER) on excess reserves with an amendment to EESA, 2008, reported in H.3 Statistical Release which the Fed considered eliminating, but has not yet done so
The issue gets more critical as the probability of the Fed raising interest rates increases
The Fed cannot stimulate the economy still recovering a lower level than growth rate trend line by raising rates and encouraging de facto hoarding

Summary

Introduction

In a low visibility maneuver, the Fed installed a policy to pay interest (IOER) on excess reserves with an amendment to EESA, 2008, reported in H.3 Statistical Release which the Fed considered eliminating, but has not yet done so. In a low visibility maneuver, the Fed installed a policy to pay interest (IOER) on excess reserves with an amendment to EESA, 2008, reported in H.3. The policy was designed but not proven to give the Fed better monetary control. It does not impact the monetary base which is the control source this policy’s effectiveness is unlikely. If interest rates follow the Fed’s highest path forecast and reach 4.5%, the Fed will pay out $112.4 bil. The issue gets more critical as the probability of the Fed raising interest rates (federal funds rate) increases. The Fed cannot stimulate the economy still recovering a lower level than growth rate trend line by raising rates and encouraging de facto hoarding.

Policy Issue

Consequences of Policy Error

Policy Correction

Findings

Recommendation