Re:Federal Reserve Now Projects Rate Increases in 2023 as Ec...
by KyleBrandt on Wednesday June 16, 2021 @04:16PM
(#27532975)
My current understanding is that the reserve rate is now 0% https://www.federalreserve.gov/monetarypolicy/reservereq.htm , so it can all be loaned out.
Re:Federal Reserve Now Projects Rate Increases in 2023 as Ec...
by woodruffw on Wednesday June 16, 2021 @05:05PM
(#27533459)
Yeah. My operating assumption was that the 0% rate was an emergency maneuver by the Fed to increase liquidity at the very beginning of COVID, but it's not clear when (if at all) they plan on returning to a nonzero reserve rate.
OTOH, the Fed has other mechanisms for encouraging bank reserves -- I believe they still pay interest on any excess reserves that banks hold at the end of each day. That rate (the "IOER rate") is (still) significantly higher[1] than the federal funds rate[2], so banks can essentially collect free money by keeping any reserves at all.
I'm not an economist, but I think the Fed distinguishes between these activities: "saving" means holding money in accounts that are subject to the FDIC's reserve requirements, which in turn means that banks can't use (all of) that money for investments. "Investing" means circulating money in instruments that aren't generally subject to reserve or similar requirements, meaning that it's supplying liquidity to the larger market.
I agree with your broader point about consumption (we really need to correct our infinite-growth mindset), but an economy that encourages excessive savings is about as bad long-term as one that encourages people to shove all of their money into the market.