Just how expansionary has the Fed actually been?
In my view, Fed policy during 2020 has been contractionary, as both NGDP and price level forecasts have declined. Many people prefer to look at monetary policy in a different way, focusing on the money that the Fed injects into the banking system. And by that measure, policy has indeed been expansionary.
But perhaps not as expansionary as you might assume. Six years ago, total commercial bank reserves balances at the Fed totaled $2.8 trillion. The most recent data indicates that total reserve balances at the Fed are $2.8 trillion. That’s no growth in 6 years, even in nominal terms. (Reserves have obviously declined as a share of GDP.)
Again, both the overall monetary base and the part of the base held as bank reserves at the Fed have increased sharply this year, after declining from a peak in August 2014. But the current level of reserves is not extraordinary; at least not in the way that this year’s budget deficit is historically unprecedented. (The deficit rose from below $500 billion in 2014 to $3.1 trillion this year.)
The Fed could have injected vast sums of money into the US economy, many times more than they injected during the Great Recession. They chose not to do so for reasons that I cannot explain. Someone should ask Jay Powell, especially given that he’s calling for even more trillions in fiscal stimulus. Monetary stimulus does not add a penny to the national debt.