Meanwhile, Canadian inflation came in at 2.5% YOY for the month of July for the seventh straight month of sub-3% YOY inflation. Coupled with a weakening economy a third rate cut in September is now almost certain. Just wish the Bank of Canada would do something bolder than 1/4% cuts.
To increase money supply, they buy securities. Given that the money supply is sufficient, they use the administrative rates to control the federal funds rate.
It is true that the Federal reserve “prints money” by buying gov securities from banks and these banks are paid in “reserves”. It is written as such on the federal reserve website:
https://www.stlouisfed.org/on-the-economy/2018/july/federal-reserve-control-supply-money
The primary way the Fed controls the monetary base is through open market operations: buying or selling securities. To increase the monetary base, the Fed buys securities from any party and pays with a check. That check, written on the Fed, is deposited by a bank in its account with the Fed, thereby adding to its reserves and increasing the monetary base. The same process works for decreasing the monetary base: The Fed sells securities, getting a check from a bank in exchange. When the check is deposited, the bank’s balance at the Fed decreases.
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Exactly. One glance at the graph of the Fed Balance sheet over time is enough for anyone to see where the money came from…
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
The monster jump in the Fed balance sheet was its way of dealing with the series of pandemic relief acts passed by Congress. The estimates I’ve seen put the total expenditures at about $5 tr. if I recall correctly, I deposited a check into my bank account for somewhere near $2200. It was from the US Treasury, much like an ordinary tax refund. Congress authorized the treasury to send out those checks.
The Fed is charged with steering the money supply towards balancing unemployment and inflation. Usually, inflation is the primary target. But the relief acts were designed to keep,spending levels high enough to keep people employed, not really sensitive to the impact on the money supply. Hopefully, Congress knew this.it was going to cause inflationary pressures. The Fed used its tool kit to pump up the money supply, as ordered.
But it seems fair for me to say that the source of the “printed money” was Congress. Laying the situation on the Federal Reserve Board is a bit misleading. It’s Congress. The Fed did not cause the problem and I doubt they can fix it themselves.
We need to ask ourselves “Why is the financial system so vulnerable?” And start from there.
But the Federal reserve operates independently of the gov, at least they are supposed to. The gov can spend a lot precisely because the Federal reserve makes it possible to borrow trillions without the yield going up. So in my view the Federal reserve did cause the problem. Anyways, Covid was a special situation so I’m assuming the Federal reserve’s priorities changed. It’s clear that we were going to have some inflation after covid, but I think 8% inflation was higher than expected and the Fed is to blame for not raising rates fast enough.
And hopefully it always will be so.
As much as I am critical of some central bank moves, it is a better system than the politicians telling them what to do.
Independently but hand in hand? The government sells bonds to fund the checks and the Fed buys those bonds at the rate the government wants. What happens if the Fed says creating all that money is going to be inflationary and doesn’t buy the bonds? So are they really working independently?
im confused about this. the fed apparently controls 3 rates which are supposed to bound the federal funds rate. but what happens if the fed doesnt increase the money supply while the demand for money rises significantly? i think the federal funds rate would go above the discount rate then banks would borrow from the fed to buy gov bonds. does this mean the money supply went up? im under the impression that the fed would take notice and adjust reserve levels.
Slight caveat there as there are two things in play.
You can have an increase in the money supply with zero increase in inflation if the velocity of money in the real economy does not change.
Effectively, you can have a lag because borrowed money can sit at the bank without being spent in the real economy.
Therefore, a money supply increase has to be linked to an increase in the velocity of money (more money in the real economy chasing the same goods and services) for there
to be price inflation.
Conversely, you can have a decrease in the money supply (tapering of QE), while the velocity of money is still increasing because there is still a glut of excess money out in the real economy.
The point of tapering is to reduce the glut of excess money so that the velocity of money decreases in the real economy. At that point inflation should stabilise.
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I hate shrinkflation. It messes up recipe proportions when you change the size of items. In most cases, I strongly prefer a price increase over cutting the package size to keep the price the same.
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Same
I saw a food scientist who responded to someone who was wondering how their cake mix reduced the number of oz in the package but kept the exact same added ingredients and baking instructions. Like you still added 1 egg and 1/2 cup oil and some amount of water or milk. She went through the ingredient list on the two packages and noted that the listed ingredients changed slightly and explained that they had probably reduced the amount of flour and some other ingredients but added other things to adjust things so the instructions remained the same and you got mostly the same quality of cake after baking. And with the substitution of some cheaper ingredients and removal of some of the other ingredients to provide overall less stuff in the box they could sell it for the same amount even though it was less and if you didn’t look closely you wouldn’t notice until you were done and found the cake smaller than you remembered.
Random tangent: i was at a CAS meeting once and I enjoyed an extended conversation with a food scientist. She was the wife of another attendee.
Easier to make a cake from scratch. Ingredient levels dont change.
A pound of sugar, a pound of flour and a pound of butter. Then a couple other ingredients isn’t that a pound cake?
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Three-pound cake, to be more accurate.
I wish i still had the letter I sent to Entemens one drunken night in college about their 12 oz pound cake. They did say they framed my letter and sent we some coupons with a nice reply.
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There is a word for that now: Enshittification.
Making the weight broadly the same, but modifying the ingredient list to be cheaper, leading to a lower-quality product on the consumer end.
This is very hard to “capture” when it comes to inflation statistics.
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The last 4 years (Sep-Aug), we’ve had year on year rates of 5.3, 8.3, 3.7 and 2.5%. A four year increase of 21.2% and average of 4.9% pa. UK has had an almost identical total over the last four years (ending July) of 21.9% and average 5.1% pa.
As someone who lived through the '70s and '80s, how is this still an election issue?
Rental Inflation has been much, much higher.
At least in the UK
So my first impression is that vs 70/80s, the main difference has been housing.