Please excuse me if this has already been brought up, but I just watched the witch-king on Yahoo
http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=10074686&src=finance&ch=289023
and I have a couple of questions.
Do I understand correctly that the Federal Reserve can now legally pay interest on its reserves?
Do I interpret this correctly to mean that the Federal Reserve is no longer limited to simply spending money into existence, for it can now pay it directly into existence as interest?
Wow.
That is correct. The primary motivation for this is to allow the Fed to expand the money supply without driving the federal funds rate below the target.
You propose that, by this stratagem, the federal reserve intends to expand the money supply but preserve the federal funds rate. Can this work? To work, I assume the interest rate on excess reserves would have to be more attractive than the interest on overnight, interbank loans, correct? Further, I assume that overnight loans have returns which are competitive with loans to businesses, correct? If correct, then the supply of money will expand since the banker will simply sit on his excess (growing) reserves. The ploy will work, but is this consistent with the fed's stated goal of stimulating aggregate demand (by dumping credit into the hands of businesses)?
You propose that, by this stratagem, the federal reserve intends to expand the money supply but preserve the federal funds rate.
Can this work?
To work, I assume the interest rate on excess reserves would have to be more attractive than the interest on overnight, interbank loans, correct?
Further, I assume that overnight loans have returns which are competitive with loans to businesses, correct?
If correct, then the supply of money will expand since the banker will simply sit on his excess (growing) reserves.
The ploy will work, but is this consistent with the fed's stated goal of stimulating aggregate demand (by dumping credit into the hands of businesses)?
It's not consistent with anything other than helping the Fed preserve their credibility. Although I'm sure they would say otherwise.
I have the option here to click on verify answer. Does one select this after getting a satisfactory answer?
Yes, it's meant for the other readers to easily see the question and best answer more easily, without reading all posts.