Abstract
We demonstrate that IOER should make the excess reserves even larger, continuing the problem of monetary policy control and rewarding the banks for their policy errors fostering the Great Recession by giving them risk free returns on the $2.5 trillion of idle funds that are benefiting no one except the banks themselves, or having the banks invest those idle funds in some useful manner such as helping finance the government deficit and fix our roads and bridges. The number 1 priority should be to get rid of the troublesome excess reserves and utilizing open market operations (OMO).
Highlights
This paper is about how short term interest rates should be raised, not when
A factor not mentioned, at least on CNBC, is the huge level of excess reserves held by the banks that are a result of the bank bailout from the Great Recession of 2008-9
A feature of open market operations (OMO) is that while selling TBills to raise rates excess reserves will be reduced as banks purchase the bills, solving the "excess” excess reserves problem
Summary
The basic criticism of the current situation of near zero short term interest rates with one .25% increase in Dec. 2015 is that they are not “normal". This brings up the question of what is "normal". Huge excess reserves are not normal either and there is a connection. To gain some perspective on what is normal and what is not the following table shows the 3mo TBill rate (i3mo) and Fed Funds rate (iff) along with excess reserves (Re), deposits at banks (DpT), and excess reserves as a percent of deposits (re).
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