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Ep.116 Real Conversations: Judy Shelton, Senior Fellow, Independent Institute

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Redirecting Cash Can Stifle Growth

The rapid increase in interest rates by the Federal Reserve has primarily been executed through altering the administered rate, impacting banks' reserve balances without injecting capital into the real economy. This strategy often leads to cash being parked through reverse repurchase agreements instead of promoting productive economic activity, resembling government subsidies that discourage growth, such as paying farmers not to cultivate. As banks benefit from generous interest rates on reserves, borrowing costs for the broader economy rise, creating a situation where fiscal transfers lack productivity. This approach contrasts with historical methods like those used by Paul Volcker, who actively engaged with market mechanisms. A reevaluation of these practices is necessary for fostering more dynamic economic engagement.

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