第28章金融政策と銀行規制

In the Federal Reserve Act, the phrase “...to afford means of rediscounting commercial paper” is contained in its long title. This was the main tool for monetary policy when the Fed was initially created. Today, the Federal Reserve has even more tools at its disposal, including quantitative easing, overnight repurchase agreements, and interest on excess reserves. This illustrates how monetary policy has evolved and how it continues to do so.

The second traditional method for conducting monetary policy in a limited reserve environment is to raise or lower the discount rate. If the central bank raises the discount rate, then commercial banks will reduce their borrowing of reserves from the Fed, and instead call in loans to replace those reserves. Since fewer loans are available, the money supply falls and market interest rates rise. If the central bank lowers the discount rate it charges to banks, the process works in reverse.

In recent decades, the Federal Reserve has made relatively few discount loans. Before a bank borrows from the Federal Reserve to fill out its required reserves, the bank is expected to first borrow from other available sources, like other banks. This is encouraged by the Fed charging a higher discount rate than the federal funds rate. Given that most banks borrow little at the discount rate, changing the discount rate up or down has little impact on their behavior. More importantly, the Fed has found from experience that open market operations are a more precise and powerful means of executing any desired monetary policy.

A potential third method of conducting monetary policy in a limited reserves environment is for the central bank to raise or lower the reserve requirement, which, as we noted earlier, is the percentage of each bank’s deposits that it is legally required to hold either as cash in their vault or on deposit with the central bank. If banks are required to hold a greater amount in reserves, they have less money available to lend out. If banks are allowed to hold a smaller amount in reserves, they will have a greater amount of money available to lend out.

Until very recently, the Federal Reserve required banks to hold reserves equal to 0% of the first $14.5 million in deposits, then to hold reserves equal to 3% of the deposits up to $103.6 million, and 10% of any amount above $103.6 million. The Fed makes small changes in the reserve requirements almost every year. For example, the $103.6 million dividing line is sometimes bumped up or down by a few million dollars. Today, these rates are no longer in effect; as of March 2020 (when the pandemic-induced recession hit), the 10% and 3% requirements were reduced to 0%, effectively eliminating the reserve requirement for all depository institutions.

The Fed rarely uses large changes in reserve requirements to execute monetary policy; the pandemic was an exception for obvious reasons. Also, a sudden demand that all banks increase their reserves would be extremely disruptive and difficult for them to comply. While loosening requirements too much might create a danger of banks’ inability to meet withdrawal demands, the benefits of reducing the reserve requirements in March 2020 exceeded the risks.

In the following section, we will discuss how interest on excess reserves is used as a monetary policy tool.

As we noted previously, banks in the United States have historically had very little reason to keep more than their minimum required reserves because their regional Federal Reserve bank did not pay any interest on those reserves. This behavior changed dramatically during the 2008–2009 financial crisis.

During this period of time, 389 banks failed. The banks that survived responded to the financial crisis by increasing their reserves well beyond their required minimum. Combined with the measures undertaken by the FOMC and the U.S. government to respond to the financial crisis, banks’ reserves increased from around $15 billion in 2007, to $2.7 trillion by late 2014. While reserves did decrease to around $1.7 trillion by 2017, this was no longer an environment of limited reserves, but an environment of ample reserves. In fact, in 2019, the FOMC issued a statement indicating that monetary policy would be based on ample reserves. While it may be a good decision for banks to keep ample reserves, as we know, the banking system facilitates both short-term and long-term economic activity when it makes loans to finance consumption, for business investment and expansion, and to help fund and support innovation, among many other possibilities. In a sense, loans allow for the economy to ultimately become more productive, causing an increase in long-run economic growth. The point is that we need the banking system to be willing to make loans and not just keep ample excess reserves. However, when banks are keeping a trillion or more dollars as excess reserves, these are funds that they are choosing not to lend out, potentially causing the economy to grow at a slower rate than it otherwise might.

How then can the FOMC incentivize banks to lend out these excess reserves? This is where the interest rate on reserve balances (IORB) comes in. The IORB is the interest rate paid to banks for their holdings of excess reserves. Congress granted the Federal Reserve the ability to pay this interest in 2006. The policy was originally slated to begin in 2011, but the financial crisis accelerated its start date to 2008. (For a few years there were two separate rates, the interest rate on required reserves and the interest rate on excess reserves, but these two were combined into the IORB in 2021.) The FOMC controls the IORB directly. It sets the IORB at whatever rate it chooses, based on macroeconomic conditions and forecasts.

We can now explore how the IORB may affect banks’ decisions to hold more or fewer excess reserves. As we noted in our discussion of open market operations, the federal funds rate (FFR) is the specific interest rate targeted by the FOMC. The federal funds market is where banks borrow and lend their excess reserves from one another over a very short period of time, often described as overnight. It is a market, as we explained in Demand and Supply, with supply, demand, and a price. In the federal funds market, you can think of the FFR as the price a bank gets paid for lending (or selling) excess reserves in the federal funds market, and you can think of the FFR as the price a bank pays for borrowing (or buying) those excess reserves. The FFR is targeted by the FOMC because as the FFR increases and decreases, most other interest rates eventually increase or decrease too. In Monetary Policy and Economic Outcomes, we’ll show how changes in interest rates affect the macroeconomy.

To illustrate how changes in the IORB can affect the FFR, assume that the IORB is 2%, which means that a bank can earn 2% on its excess reserves, free of risk. Because in the federal funds market, the lending period is often very short-term, sometimes even shorter than one day, those loans are nearly risk-free. As a result, most banks view the IORB as a very close alternative to the FFR. If the FFR also pays 2% interest, generally, a bank will be indifferent to where it keeps its excess reserves.

Let’s say that macroeconomic conditions convince the FOMC to lower the FFR. To do this, it will lower the IORB. Let’s see why. If the IORB decreases to 1.75%, banks will generally choose to reduce their excess reserves holdings at their regional Federal Reserve bank and instead lend those excess reserves in the federal funds market in order to earn the currently higher FFR of 2%. But this increase in the supply of excess reserves in the federal funds market will act to lower the price in the federal funds market, which is the FFR.

When the FOMC lowers the IORB, it also tends to lower the discount rate at the same time. Some banks could then engage in arbitrage, which is the simultaneous (or near-simultaneous) purchase and sale of a good to profit from a difference in the price of that good across markets. In our example, if the discount rate also decreases from 2% to 1.75%, a bank could borrow excess reserves from the Federal Reserve at the 1.75% discount rate and then lend those same excess reserves in the federal funds market at 2%, earning $0.0025 on every $1.00 borrowed. (This may not seem like much, but multiply this by $1 million or $10 million and it adds up quickly.) But this arbitrage activity also ensures that the FFR will decrease as the FOMC desires because the increase in the supply of excess reserves will cause the FFR to decrease, and as banks leave the federal funds market to borrow from the Federal Reserve, the decrease in the demand for excess reserves will cause the FFR to decrease too.

Alternatively, let’s say that macroeconomic conditions convince the FOMC to raise the FFR. If the FOMC increases the IORB to 2.25%, banks will then choose to keep more excess reserves at their regional Federal Reserve bank and earn the higher IORB. This decrease in supply in the federal funds market will cause the FFR to increase as well.

Arbitrage will also ensure that the FFR increases. As the IORB increases, banks will borrow more excess reserves in the federal funds market and deposit them with their regional Federal Reserve bank in order to earn a profit on the difference between the IORB and the FFR. This increase in demand will then cause the FFR to increase as well.