Reply To: Fed isn't "really" printing money?

#17999
jmherbener
Participant

Yes, as long as excess reserves pass some threshold and are widely held by commercial banks (instead of concentrated in small number of them), then the demand to borrow reserves will be small and the resulting interest rate to borrow reserves will be low.

It should be remembered, however, that interest is paid on all reserves, not just excess reserves.

http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm

Currently, the Fed pays 1/4 percent on both required and excess reserves.

http://www.federalreserve.gov/monetarypolicy/0AD345FADDDD49A8878308C9D9202BA4.htm

Thus, unless the Fed increases the interest rate it pays on excess reserves, there is no penalty to commercial banks that convert their excess reserves to required reserves by issuing more fiduciary media through credit creation. That the Fed is paying interest on reserves, therefore, is not the reason banks are not lending.