According to Austrian David Howden:
This is an historic time. After six years of the most novel and expansive monetary policies since its creation 100 years ago, the Fed is finally ready to admit its role in prolonging the current recession… kind of.
Two economists at the Federal Reserve branch in St. Louis recently wrote a commentary blaming the sluggish recovery on consumers more interested in “hoarding” cash then spending. Not much of a surprise there, but the two reasons cited as to why consumers have a change of heart are telling.
- Increased uncertainty because of the crisis has caused an increase in money holdings.
- The low interest rate policy of the Fed has removed much of the incentive to invest that consumers used to be faced with.
So, first the low interest rate policy is the most expansive monetary policy in history. But then, the low interest rate policy is an extremely tight monetary policy!
There are those who look only at the supply of money and there are those, like Howden, who look only at demand.
Good monetary policy is good if it satisfies the demand for money, especially when the demand for money has gone up (velocity down) due to uncertainty or whatever. If it did, people wouldn´t be worried about hoarding (not spending).
Yes, the Fed is guilty, but not because people hoard due to low interest rates (which, given the view that monetary policy is conventionally thought to be interest rate policy, it is seen as highly expansionary, or ‘accommodative’) but because the Fed ‘refuses’ to satisfy the enlarged demand.