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Monetary policy tools today: Paying interest on all those reserves

As the school year winds down, the FRED Blog offers some advice to new graduates: Learning about monetary policy is a lifelong endeavor, because its tools can change even if your textbook doesn’t. (See our “textbook lag” posts, part I and part II.)

One way monetary policy tools have changed is that, effective March 26, the Board of Governors of the Federal Reserve System reduced reserve requirement ratios to zero percent: In response to the COVID-19 pandemic, the Board eliminated reserve requirements for all depository institutions to facilitate lending to households and businesses.

As the FRED graph above shows, since 2008, the volume of excess reserves has vastly outpaced the volume of required reserves. In fact, the total amount of bank reserves held at Federal Reserve Banks is at an all-time high.

Another recent change in the policy environment is described in a Page One Economics essay, “A New Frontier: Monetary Policy with Ample Reserves.” The Federal Open Market Committee (FOMC) adjusts the interest rate on excess reserves (IOER) to adjust the federal funds rate. if your textbook was published before 2008, it’s not likely to include this monetary policy tool.

Now, take your tassel from your graduation cap and bookmark the FRED Blog in your browser to keep on learning.

How this graph was created: Search for and select “Total Reserve Balances Maintained with Federal Reserve Banks.” From the “Edit Graph” panel, use the “Add Line” feature to search for and add “Reserve Balances Required; Reserve Balance Requirements.” Use “Format” to select “Graph type: Area” and choose your colors.

Suggested by Diego Mendez-Carbajo.

View on FRED, series used in this post: RESBALNSW, RESBALREQW


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