In a recent article at Economic Policy Journal Robert Wenzel says:
“If those funds start to move out of excess reserves and into the economy rapidly, the Fed will have to take counter measures, such as boosting interest rates on excess reserves (IOER) or liquidating some of their mortgage backed securities. Plosser is entirely correct, no one knows how high interest rates will have to be raised to stop the flow into the economy. It could very well end up a tiger by the tail situation, the higher the Fed boosts rates, the higher nominal rates climb (Sort of the reverse of what is going on now).”
What does he mean by “tiger by the tail situation”? Could an increase in the IOER lead to an increase in interest rates in general and thus to another bust? What is meant here?
“Tiger by the Tail” was the title of a book by Hayek in which he argued that a central bank can seem in control of the boom, inflating the money supply and lowering interest rates, but there comes a point at which it is stuck with unattractive policy options: should it continue to inflate and risk price inflation or moderate monetary inflation and risk further slowdown in the economy. The central bank loses control and becomes the prey, not the predator.