Fed Should Raise Reserve Requirements

¶ … Fed should raise reserve requirements above their minimum levels as a hedge against both inflation and the high level of uncertainty surrounding economic policy and strategy domestically today. He is arguing in more words or less for a the excess levels to be used as a "shock absorber" for the turbulence of global markets impacting the American economic system. He is also drawing conclusions of funding availability for loans when excess reserve requirements are also in place. All of these signal a very prudent and conservative approach to fiscal monetary policy; quite different than a purely Keynesian approach to solving the credit crunch the country is emerging from.

Excess reserves by the author's estimation stand at $1.5 trillion today.

Excess reserves are defined as the bank reserves that are in excess of the federally-mandated reserve requirement. The author makes note of the central bank being able to shift excess reserves to further deliver a "cushion" or "shock absorber" to the credit recovery, further assuring its stability over the long-term (Calomiris, a.15.).

4. The Fed has increased its balance sheet by requiring excess reserves and also through their reverse repos strategies, which the author points out could backfire and force a tightening of credit (Calomiris, a.15.). The Fed is also increasing its balance sheet through the indirect use of excess reserves is an attempt to carefully control money supply.

5. The author uses the term high powered money in an interesting context given its meaning, as it is traditionally a term which describes the currency plus commercial bank reserves available. He author is using the term as a proxy for liquidity of funds and their potential to re-order the overall economic landscape more effectively. He also implies that high powered money has greater velocity and elasticity, therefore is to be used carefully to modify the current economic conditions of the country (Calomiris, a.15.).

6. As the economy recovers, the value of the Fed's assets will increase due to several factors. The first being the higher returns earned on invested capital across a wide variety of projects now in progress, and the second being a lowering of excess reserve requirements which will put more money to work throughout the economy. The Fed's assets will also increase due to the strong dollar globally stabilizing it as a trading currency with leading partners including China. All of these factors will lead to a stronger asset base for the Fed.

7. The Fed will keep from selling these assets if the dollar does not gain in strength relative to other currencies globally, and would also not sell them if the economy did not reach a growth level that would ensure excess reserves were not needed.

8. Reverse repos are when "the Fed lends securities to banks in exchange for cash for a set period. At maturity, the securities are returned to the Fed, and the cash goes back to the primary dealers. By doing this repeatedly, the Fed can contract the money supply "(Calomiris, a.15.). The author says that in large financial transactions involving reverse repos the effects are unknown and therefore unreliable. It is a means to slow down money supply in an attempt to curb inflation. This technique is fraught with challenges however, as the Fed seeks to control money supply without causing a recession, while trying to control for inflation.