What private credit creation does now is critical. Velocity of money is commonly defined as the ratio of nominal gross domestic product to money stock, or the rate at which money balances turn over or change hands in a period of time relative to expenditures on goods and services.
Private Sector Credit Creation.
Government Sector The government budget is in the chart below: The United States has a free market economy, but it has some controls to keep things from going off the rails. If the supply of money and credit increases too rapidly over time, the result could be inflation.
My personal assessment is that they are just being driven by the international market price to finance the exploding US Debt level.
By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment. That is, though, just my speculation. Existing home sales have flat-lined and been the same for over two quarters as the chart below shows.
The discount rate is the interest rate charged by Federal Reserve Banks to depository institutions on short-term loans.
Or at least it used to be. To avoid interest payments, a consumer has the option of paying off the entire balance every month. Businesses will enjoy the ability to finance operations, acquisitions and expansions at a cheaper rate, thereby increasing their future earnings potential, which, in turn, leads to higher stock prices.
While traders pay attention to what the Federal Reserve is doing and prices and rates increase, there are other factors at play. I find the repeat episode of this Wall Street ritual every time the Fed increases interest rates comical today because it presumes that the Fed actually is impacting the real US economy with its rate policy in a way that higher rates would actually hit the intended mark.
Existing high levels of private debt mean there is little demand for more, and higher interest will drain more aggregate demand into debt service rather than real goods and services.
February Your question highlights a common misconception about how the Fed conducts monetary policy. What occurs at a FOMC meeting? Inflation is a sustained increase in the general level of prices, which is equivalent to a decline in the value or purchasing power of money. In more recent times since the GFC, the rest of the yield curve has also come under the control of the Fed.
Because it costs them more to borrow money, financial institutions often increase the rates they charge their customers to borrow money. Econ receives a lot of questions about the money supply. The federal funds rate is sensitive to changes in the demand for and supply of reserves in the banking system, and thus provides a good indication of the availability of credit in the economy.
By the early s, the relationship between M2 growth and the performance of the economy also had weakened. For a period of time, the Fed did in fact implement monetary policy by controlling the monetary aggregates the quantity of money.
However, some sectors do benefit from interest rate hikes. A negative flow drains it out overseas and is deflationary. Therefore, in theory, faster money supply growth should be associated with faster economic growth after a short lag of perhaps two or three quarters.
This leads to a lower yield and lower rates for things like mortgages. International Bankers Currently Control the US Inflation and Real Growth Outcome This data leads to the conclusion that there must be other structural causes in the financial market that influence the relative price of consumer goods which effectively neuters the current Fed interest rate policy.
For the past 18 years, the rate on the 2 Year Treasury has been a much weaker indicator of the on-going changes in inflation. The following chart shows the interplay of the three sectors over time: This in turn encourages spending on the big-ticket items that can be a boon for the economy.
As interest rates move up, the cost of borrowing becomes more expensive. You can review my analysis of this important question in my next scheduled article on the subject, What Will Make America Inflate Again?However, developments in the financial services industry, changes in the relationship between the money supply and the economy, as well as changes in views on monetary policy, eventually led to the Fed reverting back to implementing monetary policy through changes in interest rates (the price of money).
An analysis by USA Today shows that when the Federal Reserve raised interest rates in June by %, auto loan rates only increased by somewhere between % and % depending on the term of the loan.
Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions: as a general rule of thumb, when the Fed cuts interest rates, it causes the stock market to go up; when the Fed raises interest rates, it causes the stock market as a whole to go down.
The Fed Should Not Raise Interest Rates At Its Next Meeting In DecemberBut Might For The Wrong Reasons the rest of the yield curve has also come under the control of the Fed. Using open. Watch video · The Fed in June approved a change in the interest it pays on excess reserves in an effort to control the rise of the funds rate, the benchmark by which the central bank sets rates broadly.
However. a. lower interest rates will tend to decrease asset prices (for example, stock prices), which decreases wealth and, thereby, decreases current consumption.
b. real interest rates will fall, stimulating business investment and consumer purchases.Download