The fed is going to start paying interest on reserves it holds for banks. Apparently this is a way for the banks to self-sterilize as the fed's ability and the treasury's ability wanes. The mechanism works basically like this: the fed injects new liquidity into system, if the effective fedfundsrate drops below the interest rate paid on reserves, banks will put it's money into its reserve account to earn positive carry and reducing money in circulation.
Presumably this will allow for a huge amount of liquidity to be added to the system WITHOUT increasing the monetary base. If the fed were to continue to buy lesser quality assets, the fedfunds rate will decrease as the money enters circulation, however as the fedfunds rate dips below the interest paid on reserves, banks will simply push all that money into reserves, eventually ballooning the reserve account well beyond required.
So the monetary base will increase enormously as banks increase interest paying reserves but at the same time, that money will not be subject to fractional reserve multiplier in circulation. I'd compare this to the Supplemental Financing Program by Treasury where it sterilized $200B by auctioning off tbills and depositing proceeds at the Fed.
Final result: It seems like this allows the Fed to massively increase its facilities to banks while not having to sterilize using its balance sheet or having the Treasury increase its debt. Ultimately looks like the Fed is financing the facilities at the interest rate paid. Is this analysis correct?
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