There is 1 way the FED might stop inflation

Discussion in 'Economics' started by jueco2005, Apr 13, 2009.

  1. I think one way the FED will be able to stop the coming massive inflation is to raise % on required reserves.

    This will easier to do when the crisis is over (could take 2 or 3 more years...some say)

    AND a higher % on required reserves can shield "a little" on how big bubbles can become. I rather have a 1 category hurricane than a 5 category hurricane.
  2. sjfan


    Did you just read the wikipedia article on the federal reserve or something? Adjusting the required reserve is one of the fundamental policy tools of the fed.

  3. So what?? Do you understand what the reserve requirement means??? Do you understand fractional reserve lending???

    If you do read again.
  4. sjfan


    Having spent a few years on a repo desk, I know exactly what those things are. What I don't know is your point?

    I pointed out that reserve requirement as a policy tool already exists. It's not in active use. If you want to argue that it should be use more, then please explain why it's a better tool than monetary policies (ie, raising rates). If not, what's your point?
  5. Alright.................

    Since last year the FED has increase cash reserves by unimaginable amounts. Under the present % reserve requirements many are expecting a very high inflationary period to come in the future. However, I am saying that maybe the FED will increase the required reserve ratio to offset the huge cash buildup. I also think (in case it happens) this would make bubbles smaller and provide for better monetary stability due to a smaller FRL.

  6. May I borrow that crystal ball of your's? How can you be so sure that inflation will follow?
  7. sjfan


    I don't agree that higher reserve ratio leads won't lead to another asset bubble. The last asset bubble wasn't so much created by gaming the reserve requirement, but by gaming a legal arbitrage between ratings requirement and bank capital reserve requirements (not the same as the reserve requirement, and far more lax). It's the latter that needs to be controlled, not the former.

    As far as inflation is concerned, it's certainly possible that the reserve requirement can be used as a policy tool, but using interest rate targeting is far more effective and faster than the reserve requirement mechanism. That's why it's been the preferred policy tool in the last thirty years.

  8. Daal


    They wont raise reserve requirements because they can just remove the reserves from the banking system by selling treasuries. RR can affect banks willingness to lend and the Fed wont risk messing with that