The Institutional Risk Analyst

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Liquidity Traps and Interest Rate Ceilings

Grand Lake Stream | During our fishing trip to Leen's Lodge last week, there was a lot of discussion about the markets and whether the Fed is going to successfully manage the return to normalcy. Our bet on that question is “no” as we noted in a missive yesterday by Jeff Cox of CNBC:The Fed's effort to control the rise of its key interest rate is running into some problems.”

Dr. George Selgin of Cato Institute has a timely new paper appropriately entitled "Floored" that discusses this issue of the FOMC using interest on excess reserves as a “floor” for the Federal funds rate. In the paper, Selgin talks about “how the Fed’s floor-system experiment came about, what its intended and actual consequences have been, and why either the Fed itself or Congress