The Federal Reserve takes a lot of criticism, but on occasion we should stop and cheer its successes. Over the past 15 years the Fed has engineered a fundamental advance in monetary policy by paying interest on reserves and supplying “ample” reserves.
Reserves are accounts that banks have at the Fed. Banks settle transactions by transferring reserves between those accounts. Reserves are the most liquid asset in the economy. Before 2008 the Fed paid no interest on reserves. Banks held as little in reserves as possible, typically below $50 billion. In 2008 the Fed started paying interest on reserves. In the quantitative-easing era, the Fed bought assets, creating a lot of new reserves. Reserves are currently $3.5 trillion.
Copyright ©2023 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
