Fed Too Tight or Too Loose


“The Fed is Too Tight.” “The Fed is Too Loose.”


The validity of this statement collapses under the weight of the fallacious presupposition that the Fed could possibly hit the right monetary target—either money quantity or interest rates.

The right quantity of money consists of whatever exists at the close of business today, fixed at that quantity forever.

Money interest rates, on the other hand, result from the interaction of market actors supplying and demanding future money in exchange for present money.

Popular myth says, “The Fed adds to reserves; the money supply increases. The Fed subtracts from reserves; the money supply decreases.” Empirical evidence neither proves nor disproves this statement. It does, however, call it into question.

Over the last 33 years–until September 2008—the money supply has steadily expanded. During that same period bank reserves have risen and fallen. See the following chart:

Money Supply & Reserves

To put that period in perspective, relative to today’s craziness, see the following chart, which includes the months since September 2008:

MZM & Bank Reserves

For those who like heroes and villains, pick your Fed Chairmen heroes or villains from the last five.

Arthur F. Burns

February 1, 1970 – January 31, 1978

G. William Miller

March 8, 1978 – August 6, 1979

Paul A. Volcker

August 6, 1979 – August 11, 1987

Alan Greenspan²

August 11, 1987 – January 31, 2006

Ben Bernanke

February 1, 2006 –