Reply To: Related Question: Quantitative Easing


The Fed is paying 0.25% interest on both required reserves and excess reserves. Therefore, banks do not lose any interest payment from the Fed if they convert their excess reserves to required reserves by creating credit, i.e., extending more loans and writing the loan balances into their customers’ checking accounts. Banks are more reluctant to extend loans than they are in normal times and the Fed thinks it can regulate the banks’ extension of loans as it normalizes by paying a higher interest rate on excess reserves than on required reserves. In any case, QE (Fed purchase of securities) does increase bank reserves. Whether or not banks extend loans on top of their reserves is their option. Currently they are not fully exercising that option.