“The Fed is both raising rates and reducing bonds it holds on its balance sheet, and in 2018 ran into an issue in which the benchmark funds rate veered close to and eventually matched the same level as the interest the Fed pays on excess bank reserves. Gramm pointed out that should the market rate banks can make on loans exceeds the level the Fed pays on reserves, it could result in an explosion in the money supply that would drive inflation.”
USAGOLD note: Having written about the latent power of excess reserves for years, the editorial by Phil Gramm and Thomas R. Saving yesterday morning caught my interest. They do a good job explaining the situation for those who would like to learn about this arcane, but important, aspect of contemporary Fed monetary policy. Cox lays out the essence of that Wall Street Journal editorial in the piece linked above.
Repost from 1/3/2019