Related Question: Quantitative Easing

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  • #18631

    This is more of a general econ-related question.

    The Federal Reserve has been paying 0.25% interest to banks who park their funds at the Fed (as far as I’m aware).

    If this is the case, how would quantitative easing actually increase credit? If the Fed is buying securities from private dealers and increasing bank reserves, what incentive do the banks have to lend that money out, rather than park it at the Fed for an easy .25%?

    It seems like the Federal Reserve would have to remove that floor in order for quantitative easing to be effective.

    If interest rates have more room to fall, why not utilize traditional easing methods? Why QE?


    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.

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