Question

If money is so versatile and can buy anything, why don't people demand all the money they can get their hands on? In what sense has greater Fed transparency served as an additional policy tool, given that the federal funds rate could go no lower?

Answer 1

1. One of the biggest advantage to prefer demanding or storage of money is its liquidity. Money can be easily exchanged for goods or services without any or minimum transaction costs unlike any other financial assets. However advantageous it may seem, money has very nominal or no interest in contrast to other financial assets. Thus, even though money may offer the advantage of liquidity, people still forego this advantage due to the fact that the returns offered by the other financial assets are higher. Thus the proportion of money demanded depends upon the market interest rates too.

2. Almost two decades ago, the statements released by the Fed was very much unclear about their intentions. Thus corporates had a need to employ experts to review and decode the intentions of the Fed statements. However post 1990, Fed made its intentions very much clearer (FOMC) viz., releasing targets to meet the fed rates, releasing minutes of meeting, holding press conferences, interviews and speeches. Thus Fed now generated solid valid statements and could reach a larger audience via different media platforms.