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TLDR; Basically a bank which takes deposits from customers and then deposits the money at the Fed whereby earning a higher interest rate than the customer just

TLDR; Basically a bank which takes deposits from customers and then deposits the money at the Fed whereby earning a higher interest rate than the customer just depositing at a "regular" bank.

AstralStorm 8y ago
The problem is, the Fed would have to drop rates costing all the banks and reducing liquidity and removing the reason it exists for in the first place, which is being lender of last resort. It offers preferential rates to banks as they are cooperative agents. It is not running at free market rates. If it were to open to free market, Fed would have to adjust the rates until it matches the reserve... Unlike most agents on the market, Fed is free to deny you.
- JumpCrisscross 8y ago
  > drop rates costing all the banks and reducing liquidity Lowering rates raises liquidity. It makes it easier to borrow and thus create money. > removing the reason it exists for in the first place, which is being lender of last resort The Federal Reserve has many functions, one of which is acting as a lender of last resort [2]. Acting as a central bank, i.e. managing the country's monetary policy, is its primary purpose. Addressing bank panics, facilitating transfers, and regulating financial institutions are secondary roles (albeit very important ones). In any case, reducing the interest paid on excess reserves does nothing to the Fed's standing. For most of the Fed's history, excess reserves were not paid special interest. It's a novel monetary policy instrument, and one still very much in its experimental phase. > It offers preferential rates to banks as they are cooperative agents The Fed pays 1.95% on reserves [2]. That is 5 bps less than what the Treasury pays to hold your money for one month [3]. It's 3 bps more than the average Fed funds rate, but within the 175-200 target range and less than the 2.1% 99th-percentile rate [4]. [1] https://www.federalreserve.gov/monetarypolicy/reqresbalances.htm https://www.federalreserve.gov/monetarypolicy/reqresbalances... [2] https://en.wikipedia.org/wiki/Federal_Reserve_System#Purpose https://en.wikipedia.org/wiki/Federal_Reserve_System#Purpose [3] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i... [4] https://apps.newyorkfed.org/markets/autorates/fed%20funds https://apps.newyorkfed.org/markets/autorates/fed%20funds

TLDR; Basically a bank which takes deposits from customers and then deposits the money at the Fed whereby earning a higher interest rate than the customer just depositing at a "regular" bank.

AstralStorm 8y ago

The problem is, the Fed would have to drop rates costing all the banks and reducing liquidity and removing the reason it exists for in the first place, which is being lender of last resort. It offers preferential rates to banks as they are cooperative agents. It is not running at free market rates. If it were to open to free market, Fed would have to adjust the rates until it matches the reserve... Unlike most agents on the market, Fed is free to deny you.

JumpCrisscross 8y ago
> drop rates costing all the banks and reducing liquidity Lowering rates raises liquidity. It makes it easier to borrow and thus create money. > removing the reason it exists for in the first place, which is being lender of last resort The Federal Reserve has many functions, one of which is acting as a lender of last resort [2]. Acting as a central bank, i.e. managing the country's monetary policy, is its primary purpose. Addressing bank panics, facilitating transfers, and regulating financial institutions are secondary roles (albeit very important ones). In any case, reducing the interest paid on excess reserves does nothing to the Fed's standing. For most of the Fed's history, excess reserves were not paid special interest. It's a novel monetary policy instrument, and one still very much in its experimental phase. > It offers preferential rates to banks as they are cooperative agents The Fed pays 1.95% on reserves [2]. That is 5 bps less than what the Treasury pays to hold your money for one month [3]. It's 3 bps more than the average Fed funds rate, but within the 175-200 target range and less than the 2.1% 99th-percentile rate [4]. [1] https://www.federalreserve.gov/monetarypolicy/reqresbalances.htm https://www.federalreserve.gov/monetarypolicy/reqresbalances... [2] https://en.wikipedia.org/wiki/Federal_Reserve_System#Purpose https://en.wikipedia.org/wiki/Federal_Reserve_System#Purpose [3] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i... [4] https://apps.newyorkfed.org/markets/autorates/fed%20funds https://apps.newyorkfed.org/markets/autorates/fed%20funds