Just that the fact that the Fed is paying 0.25% on reserves has no impact on the level of reserves. Those reserves would sit there, no matter what.
Today, however, the rate can’t go up because bank selling would immediately drive it back down, so the only way to raise the rate is to raise the Interest Rate on Excess Reserves
I agree. FYI, they're paying on all reserves, not just excess reserves.
That means that the main governor on money supply growth is now bank regulations that limit loan growth via capital requirements.
Correct. They haven't been reserve constrained for a while.
>>Just that the fact that the Fed is paying 0.25% on reserves has no impact on the level of reserves. Those reserves would sit there, no matter what.<<
Let’s assume that you’re correct, although I don’t believe you are. Why then is the Fed discussing raising the interest rate that they pay on reserves in the event of a tightening? All they’d be doing, if you’re correct, is giving the banks money unnecessarily.
In fact, if the Fed tries to raise short term rates by raising the fed funds rate to, say, 2%, no bank will willingly hold an excess position if they can sell it at 2%. But with 2.5 trillion in excess, they clearly hold sufficient reserves to drive the rate back to zero. The only thing stopping them from doing so is the Interest on Reserves.
I don’t see how you can argue with that, from the perspective of an individual bank. So, it’s not “no matter what.” If the Fed tries to raise the fed funds rate, they will be absolutely unable to do so without somehow dealing with the excess reserve situation, and draining 2.5 trillion will not be practical due to the effect on their portfolio value.
I, however, go further than that. I’m reasonably certain that were the banks to try to sell reserves into the market their actions would begin to generate a significant expansion in the money supply, and that the result would be much higher inflation thereafter.
And thanks for correcting me on their paying interest on required reserves as well. I wasn’t aware that they did, or had at least forgotten it. By the way, while confirming that, I found a NY Fed paper that asserts essentially what I’ve claimed above. Raising the rate paid on reserves is necessary if they are to raise the fed funds rate.