The mins through the June 18-19 Fed conference show that the Fed is considering banks that are allowing make use of security, such as for instance T-Bills for extra reserves. They’ve been considering creating a repo center that really leads to banking institutions t-Bills that are simply posting of money for extra reserves. The mins expose amount of benefits and drawbacks because of the approach. It could be a good idea to have banks only post T-Bills for extra reserves above $20 billion.

There is plenty of conversation regarding exactly how much reserves that are excess desirable considering that, pre-crisis, excess reserves had been tiny. Really there is only “required reserves” and banking institutions by having a small additional were lending it to the ones that wanted or required a bit more. The overnight rate charged between banks ended up being held based on the Fed’s target given funds rate by inserting or removing liquidity as necessary.

The actual fed funds rate would plummet toward zero if the Fed was not propping up the rate by making excess reserves valuable by paying banks interest on those reserves with the current large supply of excess reserves. Because the system that is financial awash with liquidity from QE, there clearly was small dependence on financing between banks plus the quoted fed funds price remained the identical because the price being compensated on extra reserves. Continue reading →