Why can't the federal reserve control money supply and interest rates at the same time?

Answer 1

Because money supply causes interest rates. If there is less money in circulation, interest rates are higher (because banks dont' have as much money to lend and must charge more for it).

And Vice-versa...if the banks have more money they'll be more willing to lend it at lower rates.

The Fed could only control both at the same time if there are limits to capital investment (investment and lending) which is virtually impossible to enforce.

Answer 2

They can and do control money supply and interest at the same time.

In fact, as a matter of monetary policy, the Fed tries to maintain stable and predictable interest rates, and also meet the changing demand for money.

For example, let's say it is near Christmas. There is more economic transactions and more money is needed. So the Fed T-Bills for $100B. That action has the instant effect of increasing the base money supply (M0) by $100B. As this amount is loaned and reposited, it will eventually increase the money supply by an additional $700B (M1/M2). Interest rates remain unchanged.

Now let's say that the Fed notices increases in the producer price index and decides the economy is overheating. It needs businesses to stop investing so much. So they move the interest rates up a notch. Suddenly the cost/benefit analysis of investments across the country changes and the marketplace trims out the lower yield investments, thus cooling the economy.

To summarize:

- The Fed sets money supply targets based on the near-term demand for money

- The Fed sets interest rate targets based inflationary indicators

- One target may influence the other but for the most part, each can be managed separately

Answer 3

The fed lowers or raises short term rates(overnight bank borrowing) by adding to or subtracting from the money supply to meet the market demand for loans at the target rate. If instead they targeted the money supply then the rates would fluctuate with market demand of loans. The only way to control interest rates and the money supply independently is if they could also control market demand. Some economist have suggested that they do, to some extent, control the market demand by rules and regulation on banks producing credit rationing.

Answer 4

That is a very good observation. I don't even think the gold is in fort knox anymore. I think it's all gone and there is nothing to back the paper dollar.

Answer 5

They are doing that all the time.

Answer 6

The government is too corrupt.