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The Fed can create money

Summary:
Here’s the Financial Times: The Fed also has acknowledged it lacks the tools to solve all the problems in the economy, since it can only lend money, but not spend it to help businesses or households. And the Fed is acutely aware that its policies have done plenty to save financial markets from distress, but cannot deliver benefits as easily to low-income families and the unemployed. That’s entirely false.  The Fed doesn’t just lend money; it can and does create money and also spend the new money on assets in order to boost NGDP and help businesses and households.  This policy delivers benefits to unemployed workers by reducing the unemployment rate. The Fed is worried that the lack of a fiscal agreement will threaten the recovery and make its job harder. The US

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Here’s the Financial Times:

The Fed also has acknowledged it lacks the tools to solve all the problems in the economy, since it can only lend money, but not spend it to help businesses or households. And the Fed is acutely aware that its policies have done plenty to save financial markets from distress, but cannot deliver benefits as easily to low-income families and the unemployed.

That’s entirely false.  The Fed doesn’t just lend money; it can and does create money and also spend the new money on assets in order to boost NGDP and help businesses and households.  This policy delivers benefits to unemployed workers by reducing the unemployment rate.

The Fed is worried that the lack of a fiscal agreement will threaten the recovery and make its job harder. The US central bank does not want to be left alone in propping up the recovery.

Why?

This is good:

Some economists have suggested the Fed might tweak that to include a reference to an average 2 per cent inflation objective “over time” — reflecting its new policy framework.

Investors arguing for the new guidance to be rolled out this week say the Fed risks a loss of credibility if it does not act quickly to reinforce its monetary shift.

Today’s Fed meeting will be much more important than the typical meeting.  We will get some indication as to whether the Fed plans to obey the law—fulfill its mandate from Congress—or go sit in the corner and mope about the fact that fiscal policy is not all that it would prefer.

Bonus question: When the government lends money is that policy expansionary?  When the government borrows money is that policy expansionary?  Does the FT believe that the answer to both questions is yes?

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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