1 thought on “EC430 Poll 1”

  1. The FOMC is entertaining the option of changing its primary tool to enforce monetary policy to IOER because of the recent influx of money into the banking system. The banks excess money has decreased their need to borrow overnight in the federal funds market and has rendered this stabilization tool useless for the FED. Even if the banks do resort to borrowing from other banks the supply of capital is so great the FFR is at a historic low. I believe that paying interest on reserves is a useful tool to control inflation when the economy recovers from this recession, because the excess supply of money would cause extreme inflation. The FED having control of interest payed on reserves will slow inflation by making it an attractive option for banks to keep money on reserve with the FED. I think that even after the economy has recovered fully and the targeted FFR has been acheived the IOER still will be an effective tool for monetary policy.

    http://www.marketskeptics.com/2009/05/exploding-monetary-base-and-paying.html
    http://www.newyorkfed.org/markets/ior_faq.html

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