Controlling The Money Supply: Fed Is Seeking To Restrain Money Supply
For the second time in the last four months, the money supply has skyrocketed, for reasons that are not totally clear, and the Federal Reserve is trying to put the clamps back on.</br></br>When the central bank tightens up on monetary policy, short-term interest rates rise. Short-term rates climbed nearly three-quarters of a percentage point when the Fed put the squeeze on last spring, and they have risen a similar amount over the last several weeks.</br></br>In response to rising interest rates, major banks Friday announced that they would boost from 6.75 to 7 per cent the prime rate they charge their best corporate customers for a short-term loan. In recenl years, banks have tied their prime rates to so-called market ratesÛÓsuch as the interest paid on Treasury bills and commercial paperÛÓthat are determined by demand and supply factors.</br></br>While economists differ on how important the growth of money supply is to overall economic behavior-including economic expansion and inflation ÛÓin recent years nearly all analysts have agreed that policymakers must be concerned with changes in the money supply. The Federal Reserve Board, the nationÛªs central bank, has been entrusted by Congress to try to influence the rate of growth of money. It, does so primarily by buying and selling government securities in the open market to inject or withdraw funds from the banking system.</br></br>As the Fed has tightened money policy In recenl weeksÛÓprimarily by not supply reserves to the system and allowing the so-called federal funds rate to riseÛÓother short-term interest rates have risen as well.