This is the Cato Daily Podcast for Thursday, December 8th, 2016.

I'm Caleb Brown.

When the Federal Reserve governors meet next week, it's not clear what they can do.

That from Jerry Jordan, former head of the Cleveland Federal Reserve Bank and Jerry Odriscoll, former Vice President, its Citigroup, and a senior fellow at the Cato Institute.

In effect, they argue the Fed has effectively painted itself into a corner.

We spoke during the Cato Institute's monetary conference in November.

I'll start with you, Jerry Jordan.

Why do you argue that the Federal Reserve actions that might or might not be taken in December are irrelevant to what we should expect with respect to inflation.

Well, the actions that are able to take now are only on the liability side of the Federal

Reserves balance sheet, meaning the interest rates that they pay on commercial banks,

on the reserve deposits and on a collateralized borrowing from

commercial banks and neither of those interest rates are connected to

anything else.

The only thing that is certain when the Federal Reserve raises the interest rate at

pays banks and reserves is that the budget deficit goes up.

There's a transfer of money from taxpayers to the stockholders of banks,

from taxpayers to the government-sponsored enterprises like Jenny May, Fannie Mae, and there's to transfer to mutual funds around the world, foreign as well as domestic.

So increasing the budget deficit is not normally thought of as being a restrictive monetary policy.

Taking taxpayers money and giving it to a whole lot of people in the financial sector is not thought

of as being restrictive, and it's not clear

that raising those interest rates paid to all those people does anything to the

national economy. All right so how do we get here to this place where paying reserves on bank interest on bank deposit reserves?

...