The Fed Discourages Banks From Lending By Paying Them Interest on Excess Reserves

This is a syndicated repost courtesy of Online Course Notes For Financial Markets and Banking. To view original, click here. Reposted with permission.

At 2pm today, The Federal Reserve Open Market Committee (FOMC) will likely raise its target rate. According to the implied probabilities, there is an 84% chance of a rate hike.

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With another rate increase, the interest rate on excess reserves rises as well.

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In other words, The Fed is paying banks more interest NOT to lend to businesses and consumers.

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So, why doesn’t The Fed start charging to park excess reserves rather than paying banks a progressively higher interest rate not to lend?

This is not a sensible Fed policy.

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