Reply To: Fed isn't "really" printing money?

#17997
jmherbener
Participant

In normal times, the Fed “targets” a level for the Fed Funds rate because it thinks that upward movements in the FF rate beyond the target rate indicate that reserves are too scarce and that downward movements in the FF rate below the target rate indicate that reserves are too plentiful. When reserves are too scare, the Fed supplies more to banks by stepping up open market purchases. When reserves are too plentiful, the Fed withdraws reserves by open market sales, or at least backing off open market purchases. The Fed uses the FF rate as a feedback mechanism to gauge what should be done about monetary policy. At least, this is the theory. In practice, the Fed tends to move the target rate with movements in the actual FF rate.

Here is the graph of the Effective Fed Funds Rate.

http://research.stlouisfed.org/fred2/graph/?id=FEDFUNDS

If you set the beginning date for drawing the graph to 1982-09-27, it will have the same time line as the graph of the Fed Funds Target Rate. Then you can compare the two graphs.

http://research.stlouisfed.org/fred2/graph/?id=DFEDTAR