Paying interest on excess reserves (currently 0.25%) is a historically unprecedented policy whose purpose is to let the Fed raise market interest rates without reducing the enormous stock of reserves; because there are too many reserves to control rates via supply, the Fed will most likely tighten by raising the rate it pays on reserves rather than by shrinking the money supply.

factualpending

Speaker

John Taylor

Evidence Quote

they're going to do that by raising the interest rate they pay banks on the reserves now

Source

John Taylor on the State of the Economy 07/19/2010EconTalk
Created: 6/15/2026, 9:17:28 AM

My Notes

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