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by dragonwriter
1189 days ago
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> Some MMT theorists suspect rising rates is at least not price deflationary as is assumed by Keynesian monetary theory. And the basis is simple: An increase in debt interest has to be serviced by money creation. An increase in interest rates is not an increase in interest, because it decreases borrowing. (And even if it did mean an increase in interest, that’s a delayed effect, the impact on borrowing is immediate.) |
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To increase the federal funds rate the fed has to sell treasuries (pushing up coupon rate, which is government interest payments), or pay banks interest on reserves (give banks money), or buy assets from banks (give banks money). So from every angle, the government is creating money when it increases funds rate. https://www.stlouisfed.org/open-vault/2020/august/how-does-f...
If we zoom out, the two ways the Fed increases the rate is by giving banks free money, or pushing up bond prices (and the interest on bonds comes from new money).
Despite the enormous complexity of monetary policy, the only actual tool the Fed has underlying everything is the ability to print money.