The Fed does work indirectly and this is a common misconception by the General public. They don’t lower home loan rates and they don’t control what you pay on your credit card. The term linkages is a good one.

As for the short term spending plan to increase GDP by 4% proposed by Mr. Reeder, I would suggest that they could also do a short term tax cut to increase GDP. 😉 Beyond that difference, one should note that temporary changes are met with different results than permanent ones. Case in point is that check some of us got a while back from the IRS. Sure it was a little money in our pockets but did anyone change their spending habits? Probably not.

Fed Funds are funds which banks lend each other on an overnight basis to meet the Fed’s reserve requirements. (Most banks must hold cash reserves equivalent to 10% of their transaction deposits, but day-to-day reserves fluctuate based on transactions activities.   Contrary to popular belief, the Fed does not actually set the Fed Funds rate.  But it has great influence upon it through its open market operations.  For example, if the Fed buys government securities (e.g. Treasuries) from dealers in the open market, the Fed will make payment by adding reserves to the banks where the dealers deposit their funds. This operation increases the supply of bank reserves, pushing down the yield on Fed Funds loans.  Similarly, if the Fed sells securities it will secure payment by reducing reserves of the banking system, putting upward pressure on the Fed Funds rate.When the Fed announces its monetary policy objectives, it sets a target for the Fed Funds rate.  In then engages in daily open market operations to achieve that target. If you follow the markets, you will notice that the Fed Funds rate fluctuates quite a bit around the target (currently 1.25%) on a daily basis.The main point here is that the Fed Funds rate is a market rate determined by the demand and supply of overnight Fed Funds loans between banks. You might say, however, that the Fed “owns” (and thus has ultimate control over) this market since the market is created because the Fed maintains bank reserve requirements.

Japan and the US situation have a lot in common and have been compared by many and Yes, this is a different beast than previous recessions and overcapacity is surely out there.

But having said that, let me defend the Fed for a second and ask if our situation is really all that bad. GDP is up 2.4% for 2002, unemployment is at a somewhat high but not unbearable level around 6% (it wasn’t that long ago we thought 5% unemployment was full employment) Inflation isn’t an issue nor is deflation. We have gone through corporate scandals, a bear stock market, and a world changing terrorist act and we’re still standing.

Did the Fed do such a bad job? What could they have done differently?