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Up until recently the Fed didn't pay any interest on reserves (IOR). It was actually extremely controversial when they introduced it, but with quantitative easi
by User23 8y ago
Up until recently the Fed didn't pay any interest on reserves (IOR). It was actually extremely controversial when they introduced it, but with quantitative easing it was operationally necessary in order to continue to set the Fed Funds Rate. Generally speaking Fed accounts are like checking accounts. The Fed doesn't issue CDs, they let the Treasury handle that.
- pbhjpbhj 8y agoCan you explain the uprising necessitya little more or provide a reference. Seems strange to pay banks to do nothing, surely that reduces their incentive to provide capital.
- ttul 8y agoThe Fed started paying interest on bank deposits as a way of pushing liquidity into the market when the banks themselves were unwilling to do enough lending to restart the economy. With the deposit rate at 1.95%, a bank has to decide whether they can earn more lending to clients than just parking the cash at the Fed. Obviously at 1.95% there is still an incentive to engage in lending, otherwise the fed would drop the deposit rate to encourage that behavior.