How Central Banks Lose Control Of Money Supply

Episode 218 examines the structural shift in monetary policy where central banks, particularly the Federal Reserve, have moved from controlling interest rates by managing the quantity of reserves to setting rates while accepting whatever level of reserves the banking system demands. Lucas and Luna explore how this reversal happened post-2008, why the old money supply curves no longer apply, and what it means for inflation dynamics in October 2026. We look at the specific mechanics of the ample reserves regime, the role of the Overnight Reverse Repo facility, and why traditional monetarist metrics like M2 growth have become poor predictors of economic activity. This is a deep dive into the plumbing of modern finance, focusing on the disconnect between balance sheet expansion and consumer price index movements.

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