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RECENT VIEWPOINT: Who doesn't think they understand what money is? We all use money to buy and sell things every day. For a better understanding of what money is and how it works? Read TIA's insightful note of the topic: The Store of Value, Under Siege.

TIA ARCHIVES: In The Launch of the QE2, Dr. Tiemann addresses the monetary side of the Government's response to the fiscal crisis that we are still feeling the effects of. Read this note to get a better understanding of what's going on with our money supply and interest rates.

Read Dr. Tiemann's companion note, The Borrower of Last Resort, to learn more about the Government's fiscal response—its approach to taxation and spending—to see the ways that the Obama Stimulus plan reflects a careful reading of history and established economic theory.

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TIA's unique viewpoint expresses itself in a series of engaging essays—notes— written by Dr. Tiemann on a variety of topics

TIA's Most Current Note:

It Isn't a Forecast by Jonathan Tiemann, Ph.D. (February 2012)

We're horrified because somebody is counterfeiting boxtops,
the basis of the world's economy.
          
                — Fiduciary Blurt, Chair of the World Economic Council, in "Boxtop                             Robbery," The Adventures of Rocky and Bullwinkle"

How Low Can They Go?

On January 25, 2012 the Federal Open Market Committee, the Federal Reserve’s monetary policy-making group, announced its intention to keep short-term rates extremely low until at least late 2014, nearly three years from now.  Business reporters and market analysts were quick to ask how the Fed could know that it wouldn’t need to raise rates for that long.  Some dismissed the announcement as nothing more than Fed jawboning.  The action had little effect on short-term interest rates, but short rates weren’t the target of the action.  By the weekend, the yield on the 10-year US Treasury note fell by 15 basis points, from 2.08% on January 24 to 1.93% on the 27th.  How could the Fed’s announcement about short-term rates affect the ten-year Treasury?  And why would the Fed take such a step?

Unlike most other central banks around the world, the Federal Reserve operates under a dual mandate.  The Fed’s job is to try to maintain price stability and reasonably full employment at the same time.  Its counterparts in Europe, Japan, and the United Kingdom focus primarily on fighting inflation, and will usually only adopt an easy money policy if deflation becomes a serious possibility, or to counter a threat to the stability of the banking system, as the European Central Bank is currently doing. 

Because of the Fed’s dual mandate, its monetary actions are often overtly counter-cyclical.  The Fed may raise interest rates, tightening money and credit, to try to slow economic growth and forestall inflation when the US economy is in a strong part of its cycle.  On the other hand, the Fed will often respond to an economic slowdown by lowering interest rates, risking inflation that could result from an easy money policy in an effort to stimulate economic growth, and thus employment.

(. . . continued . . .)

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