The Fed raising the rate it pays to the big banks for storing all the excess ‘reserves’ the Fed has printed up and handed out completely makes a mockery of the idea of a ‘rate hike.’
The purpose of a rate hike is to tighten monetary conditions. That is done by removing money from circulation.
The relative loss of circulating money causes the overnight rate that banks charge each other to go up.
Why? because banks have a decision to make as to whether to lend out their excess money or keep it home. The tighter the conditions the more they can charge, and so they do.
By raising both the Fed funds target rate AND the excess reserve rate, the Fed achieves the appearance of tightening without actually doing so. Now the big banks always have the choice of either leaving their cash parked with the Fed or ‘making it work’ by lending it out to each other.
What I presume this next chart is telling us is that the hassle (or time delay, meaning liquidity) of parking money at the Fed is somehow slightly higher than just lending it out because the effective Fed Funds rate is nearly always less than the rate banks earn by parking money at the Fed.
So what happens in terms of “tightening” when the Fed simultaneously raises the Fed Funds target range and pays more on excess reserves? NOTHING! That’s what. It’s a sham.
Editorially, the idea of paying banks to park money at the Fed is a grotesque. It should not be allowed and it shouldn’t happen.
More specifically, paying the big banks several multiple of what they, in turn, are offering on CD’s is simply unfair.
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