So It Begins: Quantitative Tightening
Much like how QE was an untested Fed policy, their current attempt to reduce their balance sheet has never been done before. It likely will not end well.
Article: http://www.zerohedge.com/news/2017-12...
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It does not benefit society or the economy to have the Fed funds rate above 0%. It simply provides corporate welfare, therefore contributing to the acceleration of inequality growth.
I hope this is some really well done sarcasm.
No, I've taken the time to learn about the money system and understand that central banks manipulate the interest rate because they incorrectly believe that commercial banks can use the money multiplier model to inject excessive amounts of credit into the economy. They believe that this can be avoided by offering attractive interest on government securities.
The reason why they lower interest rates is because they believe that banks will be free to lend more money. In truth, it makes people more credit worthy to a certain degree, but monetary policy has been proven to be a blunt instrument.
Well, personally, I think interest rates should be entirely determined by the market. I also disagree with the Fed's role (and existence) in the markets, so I don't think their fed funds rate should be a thing in the first place.
But why do you believe it should never be above 0%?
Like you, I believe that it should be determined by the market. The last time the Fed left the market to it's own devices was in the days following 9/11 and the rate fell to 0%. The only reason why it increases is because the Fed sells securities to banks in exchange for their reserves, which means that they don't have enough reserves to meet their capital adequacy requirements and therefore have to borrow from one another. The interest rate set by the Fed is actually a target and not a hard number, so it's up to the banks to negotiate their own rate, but the Fed can intervene if it looks like the target won't be achieved.
I know that what I've said is very terse, but I got 1 hour of sleep last night and I'm in a half-dream state right now.
No worries. I think I see what you're saying. But we agree that without the Fed, and without fractional reserve banking that is further enabled by the Fed, the Fed funds rate wouldn't exist or be necessary.
Without the belief that fractional reserve banking is being used. <- <- <-
Fractional reserve banking is a system that uses something called the money multiplier model. This model isn't used in the US and never has been. There are plenty of economics text books, articles and videos on the Internet that present this myth as fact.
What is actually used is the credit creation model. This is where the banks get to create as much credit (money) as they like so long as they comply with their capital adequacy requirements (reserve ratios have nothing to do with this). If they find a credit worthy borrower, they can lend them any amount of money and then, afterwards, borrow any amount they need if they're short of meeting their capital adequacy requirement.
Positive Money made some interesting short videos about it.