By Eric Tymoigne
Previous posts studied the balance sheet of the fed, definitions and relation to the balance sheet of the fed, and monetary-policy implementation. In this post, I will answer some FAQs about monetary policy and central banking. Each of them can be read independently.
Q1: Does the Fed target/control/set the quantity of reserves and the quantity of money?
The Fed does not set the quantity of reserves and does not control the money supply (M1). It sets the cost of reserves; that’s it.
In terms of reserves, the Fed was created to provide an “elastic currency,” i.e. to provide monetary base according to the needs of the economic system in normal times and panic times. It would be against this purpose to implement monetary policy by unilaterally setting the monetary base without any regards for the daily needs of the economy system.