The Fed ' s Recent Defense of Interest on Reserves

As regularAlt-Mreaders know, I ’ve been saying for over a year now that, despite their promise to “normalize” monetary policy, Fed officials have been determined to maintain the Fed’s post-crisis “floor” system of monetary control, in which changes to the Fed’s monetary policy stance are mainly achieved by means of adjustments to the rate of interest the Fed pays on banks’ excess reserve balances, or the IOER rate, for short.Until recently the Fed ’s intentions had to be inferred by reading between the lines of its official press releases, or by referring to personal preferences expressed by leading Fed officials. But with today’s release ofthe Fed ’s official Monetary Policy Report by the Board of Governors, it ’s no longer necessary to speculate. The section “Interest on Reserves and Its Importance for Monetary Policy,” on pp. 44-46, leaves hardly any room for doubt that the Board of Governors still regards the IOER rate as “the principal tool the FOMC [sic] uses to anchor the federal funds rate,” and that it plans to keep on doing so after it “normalizes” monetary policy by completing its ongoing balance sheet unwind and by further raising its fed funds rate target upper limit by another percentage point or so.[1]An Awkward StartHaving already spilled several gallons of ink criticizing the Fed ’s floor system,on these pages and inFloored!, my forthcoming book on the subject, I don ’t see the point of reviewing those criticisms here, ...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs