A Quote by Mohamed El-Erian
The one instrument that has relative political autonomy is monetary policy. Central banks do not need to go to Congress to get approval for an interest rate hike.
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Monetary policy transmission encompasses the whole continuum of interest rates; of course, the central bank only determines the overnight policy rate.
In 1977, when I started my first job at the Federal Reserve Board as a staff economist in the Division of International Finance, it was an article of faith in central banking that secrecy about monetary policy decisions was the best policy: Central banks, as a rule, did not discuss these decisions, let alone their future policy intentions.
Monetary policy is like juggling six balls... it is not 'interest rate up, interest rate down.' There is the exchange rate, there are long term yields, there are short term yields, there is credit growth.
What central banks can control is a base and one way they can control the base is via manipulating a particular interest rate, such as a Federal Funds rate, the overnight rate at which banks lend to one another. But they use that control to control what happens to the quantity of money. There is no disagreement.
Central banks are choosing to increase their gold holdings as a percentage of total reserves. They obviously think there is a reason to do that. It doesn't make sense to back up one currency with a hoard of other paper currencies. There needs to be a real anchor there. I think that central banks are well behind the curve. If you look at the percentage of above-ground gold controlled by central banks, it's historically low. Hence the fact that central banks are trying to increase their holdings. They've got a long way to go to get where they need to be.
It does not stand to give banks millions of dollars at an interest rate of one percent, when banks charge students an interest rate of 6 percent. Why should the banks be scalping students?
When they so-called 'target the interest rate', what they're doing is controlling the money supply via the interest rate. The interest rate is only an intermediary instrument.
The central banks cannot control interest rates. That's a mistake. They can control a particular rate, such as the Federal Funds rate, if they want to, but they can't control interest rates.
Government should eschew suasion and directives to banks on interest rates that run counter to monetary policy actions.
I think that sharing information about our economies, the way that the central banks do in Basel and other forums, is quite useful. But it's sharing information. It's not coordinating policy. It's not coordinating a single monetary policy.
The Global Financial Crisis and Great Recession posed daunting new challenges for central banks around the world and spurred innovations in the design, implementation, and communication of monetary policy.
Corporate totalitarianism means total control by corporate interests. If they want a war, they get a war. If they want GMOs, they get GMOs. If they want fracking, they get fracking. If they want big banks to control our monetary policy, big banks control our monetary policy.
Global central banks are working hard to lift their economies through an aggressively easy monetary policy. The ECB [European Central Bank] and BOJ [Bank of Japan] are buying tens of billions of bonds and other financial securities each month in an effort to stimulate their economies, which is pushing down rates everywhere, including in the U.S.
My monetary studies have led me to the conclusion that central banks could profitably be replaced by computers geared to provide a steady rate of growth in the quantity of money. Fortunately for me personally, and for a select group of fellow economists, that conclusion has had no practical impact… else there would have been no Central Bank of Sweden to have established the award [Nobel Prize] I am honoured to receive.
However, in spite of the general perception that monetary policy should be conducted so as to avert deflation, a central bank cannot lower interest rates below the zero lower bound.
A higher IOER rate encourages banks to raise the interest rates they charge, putting upward pressure on market interest rates regardless of the level of reserves in the banking sector. While adjusting the IOER rate is an effective way to move market interest rates when reserves are plentiful, federal funds have generally traded below this rate.
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