Although the Federal Reserve authorities control the quantity of commercial bank reserves why is it that they lack complete control over the money supply?

The Federal Reserve is the central banking system in the United States, which is responsible for conducting monetary policy and overseeing the banking system. One of the key tools of monetary policy is controlling the quantity of commercial bank reserves. Commercial bank reserves are the funds that banks hold in their accounts at the Federal Reserve, and they function as a means of settling transactions between banks and providing a buffer of liquidity. Banks are required by regulation to hold a certain percentage of their deposits as reserves, which is called the reserve requirement. The Federal Reserve controls this requirement and can change it as needed to influence the money supply.

The money supply consists of currency in circulation and demand deposits (checking accounts). When banks have excess reserves, they can use these funds to make loans, which create new demand deposits and hence increase the money supply. Conversely, when banks' reserves are reduced, they need to reduce their loans and demand deposits, which leads to a decrease in the money supply. In this way, the Federal Reserve's control over the quantity of bank reserves can indirectly influence the money supply by affecting the amount of lending that banks can do. This is known as the money multiplier effect.

While the Federal Reserve can control the quantity of bank reserves and affect the money supply through the money multiplier effect, there are several factors that can cause the money supply to fluctuate independently of the Federal Reserve's control. These factors include: 1. Changes in demand for loans: The willingness of borrowers to take out loans or the preference of businesses and households for holding money affects the money supply. If borrowers reduce their demand for loans, banks may not be able to utilize their excess reserves to make loans, and the money supply may not increase as much as the Federal Reserve intended. 2. Banks' lending decisions: The level of risk banks perceive in the economy can influence their lending decisions. If banks become more risk-averse and tighten their lending standards, they may hold more reserves than required and lend less, reducing the money multiplier effect and limiting the money supply's growth. 3. Non-bank financial institutions: Institutions such as credit unions and online lenders can make loans and create money but are not subject to the same reserve requirements as commercial banks. This means their lending activity can affect the money supply independently of the Federal Reserve's control over bank reserves. 4. Currency in circulation: A significant portion of the money supply consists of currency held by the public. The Federal Reserve can control the amount of currency it issues, but it cannot control how much currency people choose to hold or spend. In conclusion, while the Federal Reserve authorities can control the quantity of commercial bank reserves, which influences the money supply, there are various factors that cause fluctuations in the money supply that are outside of the Federal Reserve's control. As a result, the Federal Reserve lacks complete control over the money supply.