The Wrong Criteria

“The exact sciences are characterized by accurate quantitative expression, precise predictions and/or rigorous methods of testing hypotheses involving quantifiable predictions and measurements.”

The money stock (& DFI credit, where: loans + investments = deposits), can never be managed by any attempt to control the cost of credit [or thru a series of temporary stair stepping or cascading pegging of policy rates on “eligible collateral”; or thru "spreads", "floors", "ceilings", "corridors", "brackets", IOeR, etc.].

Using a price mechanism (interest rates as a monetary transmission mechanism), to ration Fed credit is non-sense.Interest is the price of loanable funds / available credit (credit funded by new money and existing: foreign and domestic savings) or the Fed’s bailiwick. The price of depreciating money is the reciprocal of the price level (the free market’s bailiwick). Keynes’ liquidity preference curve (demand for money), is a false doctrine.Reserve targeting worked reasonably well until William McChesney Martin Jr., abandoned the FOMC’s net free, or net borrowed, reserve targeting position approach in favor of the Federal Funds “bracket racket” beginning in c. 1965 (coinciding with the rise in chronic monetary inflation & in anticipated inflation).

Net changes in Reserve Bank credit (since the 1951 Treasury-Reserve Accord) were previously determined by the policy actions of the Federal Reserve. Note: the Continental Illinois bank bailout provides a spectacular example of this practice. In other words the Fed allowed the commercial bankers to change their own operating procedure, and usurp their power to regulate properly, our money stock. I.e., the FRB-NY’s “trading desk” accommodated all requests at the pegged rate.

That is, additional & costless excess reserves were made available to the banking system whenever the bankers and their customers saw an advantage in expanding loans. As long as it is profitable for borrowers to borrow and commercial banks to lend, money creation is not self-regulatory. This observation would be valid even though the Fed did not use the federal funds device as a guide to open market operations. The Fed has always been motivated by an overwhelming desire to accommodate bankers and their borrowing customers

The effect of tying open market policy to a fed funds bracket was to supply additional, & excessive, legal reserves to the banking system when loan demand increased, and vice versa.
The effect of current open market operations on interest rates (now via the remuneration rate), is indirect, varies widely over time, and in magnitude. . What the net expansion of money will be, as a consequence of a given change in policy rates, nobody knows until long after the fact. The consequence is a delayed, remote, & approximate control over the lending and money-creating capacity of the banking system.

Economists should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treas. – Fed. Res. Accord of Mar. 1951 was all about.

By using the wrong criteria (interest rates, rather than member bank reserves) in formulating and executing monetary policy, the Federal Reserve accidentally concocts its own output gap. 

The "administered” or actual prices would not be the "asked" prices, were they not “validated” by money flows, i.e., “validated” by the world's Central Banks.