| | Ed wrote, But I've heard that they aren't different anymore, because, I've been told, we don't print extra money anymore. Instead, the main (the only signficant?) mechanism to increase the money supply nowadays is to lower the Fed interest rate. If that's true, then there is a functional equivalence between money supply and Fed interest rate. The interest rate you're referring to is the federal funds rate, which is the interest that banks charge other banks for overnight loans. But this rate is not set directly by the Federal Reserve. It is set only indirectly by an expansion or contraction of the money supply through the buying and selling of Treasury bonds. If the Fed wants to lower the federal funds rate, it does so by injecting money into the economy through its purchase of Treasury bonds on the open market; a procedure called "open market operations". If it desires to raise the Federal Funds rate, it does so by withdrawing money from the economy through the sale of Treasury bonds to investors on the open market.
So rather than set the federal funds rate directly by fiat, as it were, the Fed "targets" the interest rate it desires through the buying and selling of Treasury bonds, and lets the supply and demand for loanable funds determine the interest rate. If the federal funds rate turns out to be higher than the Fed's target rate, the Fed will buy Treasury bonds; if it turns out to be lower, the Fed will sell Treasury bonds, thereby withdrawing money from the economy.
The interest rate that is set directly by the Central Bank is the discount rate, which the Fed itself charges for loans to member banks, but nowadays that particular rate is rarely used in determining the money supply.
So, the Fed can determine the money supply by targeting the federal funds rate and by directly raising or lowering the discount rate. It can also do so by setting reserve requirements, the amount of money banks are required to hold on reserve (usually 10% of the total funds on deposit).
Quantitative Easing I and II focused on injecting a set amount of money into the economy rather than on targeting a specific federal funds rate, probably because the federal funds rate was already so low -- practically at zero -- that Bernanke & Co. saw it as pointless to try to lower it any further. For example, in QE2, The Fed increased the money supply by $600 billion, which it will loan to the federal government through the purchase of long-term Treasury bonds over the next eight months, thereby "monetizing the debt." Normally, the Fed buys short-term bonds on the open market as way of injecting money into the economy.
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