Why do people say a Fed interest rate cut is printing money?

Question

When the Fed cuts its rate, people say it is printing money. I realize printing money is a metaphor for increasing the money supply, but why does cutting the interest rate increase the money supply? And how do they figure out exactly how much? Like, they'll say, the fed injected 41 billion dollars (whatever) into the money supply, something like that, but they'll relate that to the interest rate cut.

Answer 1

There are three ways that the Fed changes the money supply. The first two- change in the reserve requirement and change in the discount rate- never used (the first) or don't matter (the second). The third is changing the fed funds TARGET rate- this is the one that you are talking about.

The FRB sets the fed funds target rate- but note that the actual rate is determined in the open market by lenders and borrowers.

To make the market rate converge to the target rate, the Fed buys and sells treasury securities. When the Fed buys- lets say $41 bil- T-bills from a bank- or individuals who eventually deposits the proceeds in a bank- the end result is that there is now an extra $41 bil in the banking system and part of the money supply. The sale of treasuries has the opposite effect.

To determine how much to buy, the Federal Open Markets Committee (FOMC) continuously buys and sells treasuries so that the actual fed funds rate converges to the target rate.

The previous poster errorneously stated that the Fed uses statistical techniques to determine the amount. This is not the case. The FOMC makes an initial guess and if it is wrong, it simply puts in another buy or sell order to influence the rate. This trading is done continuously to ensure that the actual and target rates are reasonably close.

Answer 2

There are three ways to cut rates in US reserve system. The Fed can buy United States Treasury obligations and issue money in stead of the interest bearing obligation. Remember money is a non-interest bearing debt obligation of the government which can be used to pay taxes. When you buy Treasuries for money, the Fed is just changing one debt for another.

The second method is that the Fed can change resere requirements, which is to say, they can increase or decrease the mandatory amount of money required to support deposit operations. It is money that is unusable and must be held in either vault cash or reserves in proportion to deposits. Theoretically, it is rainy day money.

Third, the Fed can increase or decrease the discount rate.

Using money demand equations, the Fed estimates the supply of money required to hold the economy in equilibrium. These amounts are interest rate sensitive. They estimate the impact of a rate change on the demand for money. They break the equilibrium in the case of proactive policy and follow the equilibrium in reactive policy. 99% of Fed policy is a reaction to money demand and not proactive policy. Proactive policy usually fails and usually fails miserably. The real goal of the Fed is not to make mistakes. It does not appear that the Fed can make things better, but they can make things a whole lot worse.

So it is a statistical estimation problem. The mechanism depends upon what they are trying to do and how fast they want to do it. Target audience and timing are their questions.

Answer 3

There are four ways that the money supply is affected:

1. Interest rates that make certain business projects feasible. The lower the rate the more business projects can be financed and make a profit.

2. The velocity of money. The money supply has a speed to it being used over and over again. The faster the speed the faster the velocity. Lower interest rates create a demand for money through borrowing for business projects.

3. Banks are required to hold back some of their assets instead of loaning them out. The lower the rate the more money they can loan out - to meet the demand of borrowing - caused by lower interest rates.

4. When National Banks of various countries lower their interest rates they devalue their money - which makes it cheaper for other countries to buy our goods rather than from other countries with a higher interest rate. It also makes those countries that loaned us money take a loss.

Answer 4

of route, others do not comprehend what the Federal Reserve economic organization is. particular, the Bureau of Engraving prints the actual notes, notwithstanding those notes are comprised of skinny air, sponsored with no longer something, at interest, for the Federal Reserve economic organization cartel. it really is why they are saying "Federal Reserve be conscious". we received't print our own counterfeit money, because of the reality Woodrow Wilson gave human being rights to the own Federal Reserve economic organization cartel with the Federal Reserve Act of 1913. best the cartel can create counterfeit money.

Answer 5

Homer J Simpson nailed your answer

Answer 6

Cause the more money the Fed Reserve prints out, means more inflation.