
When banks hold more reserves at the Fed than they are required to, they deprive the economy of the use of these dollars. There is also a decline in the speed at which each dollar changes hands. This rate of speed, or velocity, affects economic growth and inflation.
We have been trapped in a stagnant economic system because banks have hoarded so much of the new cash that the Fed created over the past two years. Banks have been parking this money in their accounts at the Fed. These reserve accounts at the Fed are shrinking. As banks put this money to work, they may boost economic growth and, ultimately, inflation.
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