Re: Economic Dimensions

[wfhummel@xxxxxxxxxxxxxx (William F. Hummel)]

On Thu, 30 Oct 1997 John O'Donnell wrote:

<snip>
>
>[The FED also has the much cruder control of changing reserve
>requirements that can cause very large changes in credit
>availability, but it is not used for such delicate changes as are
>ordinarily done.]
>
The reserve ratio requirements is not used by the Fed as a means
of changing credit availability.  Whenever it makes a change in
the reserve requirement, it compensates by supplying the
necessary reserves to maintain the Fed funds rate on target.  If
it failed to do so, it would give up its control of short term
interest rates.

This common misunderstanding owes its origin to the standard econ
texts in describing the money multiplier concept.  While the Fed
has the power to directly intervene in bank lending practices, it
has almost never done so.  Under normal conditions, credit
availability is not controlled by the Fed.  The only effective
tool the Fed has for controlling the amount of credit money is by
influencing demand through its setting of the Fed funds rate
target.

William F. Hummel