Re: Can the Fed set the long-rate?

[Warren Mosler <mosler@xxxxxxxx>]

Basil Moore wrote:

> William, Doug and Warren
>
>         The reason the 51 Accord became necessary was the Fed could no
> longer hold the peg, without letting the money supply rip. People were
> cashing in their gov.s at par for deposits, and there was no way the fed
> could dissuade this, without raising rates and permitting bond values to fall.
>

Cashing in govs for deposits does increase the money supply, as defined,but is
there any economic effect?  It just means the banks act as intermediaries as they
wind up holding the govs?  (all else equal)  So perhaps the Fed was concerned
that if the public held short term deposits rather than longer term gov secs they
would have a higher propensity to spend?

Warren

>         If a CB were to peg the ST rate at a low level, monetary policy
> becomes unable to restrict the growth of the MS and of AD.
>



>         Basil  (But I'm sure you all know this)
>
> At 04:24 PM 10/10/97 GMT, you wrote:
> >On Fri, 10 Oct 1997 11:43:21 -0500, you wrote:
> >
> >>Just a note to support Warren's response to Doug that its the Fed's choice
> >>only to affect the short-rate.  Between 1940 and 1951 the Fed did affect
> >>(controll) all interest rates -- until the Accord of 1951.  That permitted
> >>Roosevelt to finance the war at an averager long rate below 4 %.
> >-----------
> >Yes, but under conditions of wartime rationing and other
> >restrictions, and without such broad ownership of the debt,
> >including about a third in foreign hands.  The market is a quite
> >different thing today.
> >
> >William F. Hummel
> >
> >
>
> Basil Moore, Department of Economics
> Wesleyan University
> 685-2363



--
Warren Mosler
Director of Economic Analysis
III Finance

http://www.warrenmosler.com