LAKE BLUFF, Ill.--(BUSINESS WIRE)--The following is a statement from Moebs Services.
Money is difficult. A basic business principle is: you cannot manage what you cannot measure or track – the management, measurement and tracking of money is no different.
Moebs Services, an economic research firm headquartered in Lake Bluff, IL, has refined traditional money management measurement and tracked the Federal Reserve’s money management performance over the last half century. The result? The Moebs’ study shows inconsistent money management by 6 Federal Reserve Chairmen since 1959. Will Janet Yellen continue this performance?
How Money is Measured
Money can be measured in different valid ways as long as the metrics used are defined. Moebs' study tracks deposit money using refined metrics that reveal a telling inconsistency over the last half century. The Moebs study, reported in the accompanying chart, measures the sum of M1, M2 and M3 using the traditional definition of “insured” and “reservable.” “Insured” means the government guarantees the holder won’t lose the money kept on deposit in an approved depository. “Reservable” means a percent of the money is kept with the central bank. M1 equals insured, reservable transaction accounts – checking; M2 equals insured, non-reservable deposits like savings and time deposits; and M3 equals un-insured, non-reservable deposits or Money Market Mutual Funds. Important to note: Moebs M1 metric does not include currency. Moebs M3 is adjusted for deposits of foreign banks invested in Money Market Mutual Funds. This adjustment prevents the double counting of foreign bank deposits as both M2 and M3.
These monetary metrics are summed and collected quarterly. For the past 54 years, the average quarter to quarter change is 7.5% - with a reasonable range of 5.0% to 10% shown in the gray band on the chart. The “Real change” means the amount of change over and above the average.
Will Yellen Use Fed’s Newest Tool to Stimulate the Economy?
For the past 50+ years, the Federal Reserve Bank has used 3 tools to control the amount of money available and its rate of change: 1) purchasing or selling securities such as Mortgage Backed Securities currently being done in QE3, 2) increasing or decreasing the amount of reserves on transaction deposits at insured depositories, and 3) using the discount window to lend money mainly to banks. The most powerful of these tools is the purchase or sale of securities, or “Open Market” activity. Prior to World War II, Open Market activity was used infrequently; this lack was a major cause of money shrinking, or being depressed, causing the Great Depression. In 1947 Congress gave the Federal Reserve marching orders with legislation which said to stimulate job growth and control inflation. Open Market activity was used mainly to achieve these Congressional goals. The result is an inconsistent supply of money with jobs and inflation rising and falling as often as money has, especially, since 1988 with the Volcker era and continuing in the Greenspan and Bernanke eras.
When the mortgage bubble burst in September, 2008, Treasury and the Federal Reserve petitioned Congress for aid to unlock frozen financial markets. The TARP Act of 2008 is known primarily for $600 Billion of funds created by Congress to assist banks, AIG and the auto industry. What the TARP Act is not known for is introducing a new 4th tool of monetary policy: interest paid or charged on reserves held by the Federal Reserve.
With the TARP Act, the Federal Reserve can either pay or charge interest on reservable transaction accounts or reservable monies not in loans or investments or “excess reserves,” i.e., reserves invested by banks, thrifts or credit unions into the Federal Reserve. The Federal Reserve has several options and could either: pay, charge or have no interest on various reserve levels.
Since the Fall of 2008, the Federal Reserve’s Open Market activities increased the Federal Reserve’s balance sheet to over $3 Trillion with $2.4 Trillion as reserves held mainly by banks. The Federal Reserve is paying approximately 25 basis points on these reserves. If the Federal Reserve charged for the reserves instead, would banks and credit unions lend these funds? Banks’ margins are under pressure due to low rates triggered by the Federal Reserve, so the answer becomes “yes”—charging interest on these reserves would encourage banks to move money to the marketplace and increase lending. This approach is supported by Federal Reserve Governor James Bullard of the St. Louis Federal Reserve Bank.
So, the question remains for the present: will new Federal Reserve Chair Yellen, when approved, act like her predecessors in using only 3 of the 4 Federal Reserve tools – with a resulting inconsistent flow of money, or will she use the newest 4th tool and charge for reserves? Her approach will be known shortly. And we will begin to measure and track the results and report on Chair Yellen’s money management performance over the next quarters.
About Moebs Services
Moebs Services, an independent economic research firm established in 1983, collects statistically significant, primary empirical data about financial institutions’ services, pricing, operating expenses and financial condition. We then analyze the data in a counter-intuitive manner, resulting in solutions that make sense. For more information please visit www.moebs.com.