December 22, 2013 at 5:37 pm #18165
One has to look at the evidence to see whether or not bank reserves expand when the Fed buys securities. Often they do, sometimes they don’t.
But in our current situation, in which banks are holding over $2 trillion in excess reserves, muted price inflation has little to do with the Fed using reverse repos to counter-balance a further increase in reserves from its securities purchases. Price inflation has been muted for two reasons. First, because banks have been building excess reserves instead of creating fiduciary media. And, second because the demand to hold money has been increasing.