Question

The phrase "printing money" tends to be tossed around in discussions about the money supply. How important is cash to the overall money supply? In our system the Federal Reserve Board has at least some control over the money supply. How are they related to the Federal government? What was the FRB's latest change to the money supply? (This summer they targeted a .25 drop in the interest rates they watch.) Why did they make the change they did? Do you agree it was needed to either boost or slow the economy?

Answer 1

Cash is important to the overall money supply because it has a multiplier effect as the cash reserves prevalent with banks increase when more money is printed, which tends to increase the flow of credit in the economy. The cash is held in depository institutions as reserves and as deposits in Federal reserve banks. The federal reserve sells the cash to commercial banks which then give it to private carriers. Thus the money is circulated into the economy.

The Federal reserve board members are nominated by the President of the Federal government which is the central government. Thus the board members are appointed via the government.

The Federal Reserve Bank has kept the target rate unchanged at its latest September monetary policy meet at 0-0.25% federal funds rate. They made the change in March 2020 in order to increase the level of money supply in the economy and increase the credit flow so that people would borrow more and invest in the economy, helped by the low interest rates.

The change was needed in order to boost the economy as several businesses were shut and would have faced several working capital constraints because of the lockdown measures imposed by the government and as several global supply chains were disrupted. As the output also declined, increase in money supply buttressed the consumption, government expenditure and investments in the economy to a certain extent.