Should The Fed Target Interest Rates — Or Gold?
The Federal Reserve has cut a key interest rate to 3.75 percent. It is said that the Fed is easing monetary policy, which should lead to faster economic growth; however, there has been little evidence of more business activity since the Fed first cut interest rates in January. Some economists question whether the Fed should target interest rates. The Fed doesn’t actually cut interest rates — it increases the supply of money (liquidity), causing interest rates to fall. It only controls one specific rate, called the federal funds rate, which is the rate banks charge each other on overnight loans. When this interest rate falls, others should follow. The Fed conducts monetary policy principally by buying and selling U.S. Treasury bills, notes and bonds. When it buys securities, it adds liquidity by creating the money to pay for its purchase. If it wishes to reduce liquidity, it sells securities from its portfolio. Most of the money in our economy is actually created by banks. Thus the mon
