"So why did the monetary base increase not cause a proportionate increase in either the general price level or (gross domestic product)?" economist Yi Wen and associate Maria A. Arias asked in the St. Louis Fed paper . "The answer lies in the private sector's dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase in money demand has slowed down the velocity of money."

Much of that liquidity, however, has sat fallow. Banks have put away close to $2.8 trillion in reserves, and households are sitting on $2.15 trillion in savings—about a 50 percent increase over the past five years.

That has happened despite nearly six years of a zero interest rate policy and as the Fed has pushed its balance sheet to nearly $4.5 trillion.

Though American consumers might dispute the notion that inflation has been low, the indicators the Fed follows show it to be running well below the target rate of 2 percent that would have to come before interest rates would get pushed higher.

The St. Louis Federal Reserve thinks it has the answer: A paper the central bank branch published this week blames the low level of money movement in large part on consumers and their "willingness to hoard money." The paper also cites the Fed's own policies as a reason for consumers' unwillingness to spend.

One of the great mysteries of the post-financial crisis world is why the U.S. has lacked inflation despite all the money being pumped into the economy.

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Monetary velocity—or the force to which money is put to work in the economy—is widely considered a key metric in measuring inflation.

Under normal circumstances, according to the Fed analysis, when the money supply increases at a faster rate than economic output, which has been the case since the Fed has instituted its aggressive easing practices, prices should keep pace. Factoring in the growth in the money supply against output, inflation should have grown at a whopping 33 percent annually, when in fact it has been rising less than 2 percent.

The reason that inflation hasn't kept up with gains in the money supply simply has been that people are sitting on cash rather than spending it, which has kept money velocity at historically low levels. Yi and Arias explained:

During the first and second quarters of 2014, the velocity of the monetary base was at 4.4, its slowest pace on record. This means that every dollar in the monetary base was spent only 4.4 times in the economy during the past year, down from 17.2 just prior to the recession. This implies that the unprecedented monetary base increase driven by the Fed's large money injections through its large-scale asset purchase programs has failed to cause at least a one-for-one proportional increase in nominal GDP. Thus, it is precisely the sharp decline in velocity that has offset the sharp increase in money supply, leading to the almost no change in nominal GDP.



The hoarding of money, then, is attributed to two factors:

A (gloomy) economy after the financial crisis. The dramatic decrease in interest rates that has forced investors to readjust their portfolios toward liquid money and away from interest-bearing assets such as government bonds

The Fed pair go on to make a fairly stunning indictment of sorts about Fed policy:

In this regard, the unconventional monetary policy has reinforced the recession by stimulating the private sector's money demand through pursuing an excessively low interest rate policy (i.e., the zero-interest rate policy).



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They make one final point in regard to interest rates.

Fed policy, in which it has expanded its balance sheet to nearly $4.5 trillion by buying various debt instruments, including Treasurys, has driven interest rates lower. Under normal circumstances, the decline in 10-year Treasury rates would have pushed monetary velocity lower by 0.085 percentage points. Instead, it has declined 5.85 percentage points, fully 69 times more than models would suggest, the paper states.

This happened because the nominal interest rate on short-term bonds has declined essentially to zero, and, in this case, the best form of risk-free liquid asset is no longer the short-term government bonds, but money.



The findings, of course, beg the question of what happens once the Fed takes its foot off the throat of bond yields, people start spending again, and the velocity of money, at least theoretically speaking, runs wild.

Economist Michael Pento, a frequent and harsh Fed critic, believes the St. Louis group has some of its assumptions wrong, particularly its understanding of why people aren't spending money. He sees it more as a function of high levels of debt that are constraining spending.

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While Pento believes rates should rise, he thinks the initial reaction is going to be painful for the economy and unlikely to unleash a torrent of new spending.

"They're hard-money guys and I like them," Pento said of the St. Louis Fed. "I think they're trying to make an argument for interest rates to go up. But if they think rising rates are going to be good for the economy in the short term, they're mistaken."

Christopher Whalen, senior managing director at Kroll Bond Rating Agency, believes the Fed will come to regret how much it expanded its balance sheet and how long it kept rates low.

"The risks of continued low interest rates when measured against market benchmarks such as corporate bond spreads and volatility suggest to us that the longer the (Fed Open Market Committee) continues current policy, the more likely we are to see an adverse event in the financial markets when interest rate policy does change," Whalen said in a note. "We believe that the Fed's refusal to normalize interest rates now, during a time of high investor demand for assets, and relative economic stability and growth, could lead to adverse market conditions in the future."



—By CNBC's Jeff Cox.



Read MoreKocherlakota: Inflation to stay subdued until 2018