Mechanics of a fed hike

  • This topic has 1 voice and 0 replies.
Viewing 1 post (of 1 total)
  • Author
  • #20414

    From my understanding, the Fed raises rates using two tools: interest on excess reserves (IEOR) and reverse repurchase operations (RRP). From an NBC article on the topic, “The former involves payments on the $2.3 trillion or so of excess reserves banks currently hold at the Fed, while the latter are short-term — almost always overnight — purchases of a security with the agreement to sell later at a higher price.”

    So first, why wouldn’t payments on excess reserves held at the Fed qualify as additional liquidity/easing? After all, they’re sending the banks newly printed money for holding reserves at the Fed. Is it because, had the reserves instead been loaned out, the banks would inject a multiplier of that amount into the economy instead of merely receiving a .25% higher interest rate? If so, how could a .25% higher interest rate encourage a bank to have more excess reserves at the Fed? (Surely they can make more than that, even on the margin, by loaning it out?)

    Second, how does the Fed have so much influence on the overnight rate of a repo? Is the Fed constantly in this market with enough influence to somewhat set the prices here?

    Third, I have always liked Huerta de Soto’s conception of central banking interest rate decisions as price floors/ceilings doomed to the same consequences of other price controls. Do the actual mechanics of how the Fed sets these rates make it different from standard price controls?


Viewing 1 post (of 1 total)
  • You must be logged in to reply to this topic.