You already explained why. If they raise Fed Funds and leave the rate on reserves at 0.25%, banks will lend excess reserves and drop the Fed Funds rate back to 0.25%.
But with excess reserves so high, which banks even need to access Fed Funds?
I don’t see how you can argue with that, from the perspective of an individual bank. So, it’s not “no matter what.”
A bank lending reserves to another bank does not reduce the level of reserves in the system. That's all I'm arguing. The Fed could stop paying 0.25% and reserves would not change. The Fed could raise their payment to 4% and reserves would not change.
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,
Who would they be "selling" reserves to?
>>A bank lending reserves to another bank does not reduce the level of reserves in the system. That’s all I’m arguing. <<
If that’s all you’re really arguing then I don’t see why we’re arguing at all because I completely agree, and never said otherwise. As we both know, only the Fed can control the total reserves in the banking system.
If we do disagree, it would appear to be on what would happen if the Fed didn’t neutralize the excess reserves by paying interest on them while at the same time trying to effect a tightening. It appears that we’ve agreed that they can’t leave the IOR rate at .25 and still increase the fed funds rate appreciably, so that leaves open the question as to how they would manifest a tightening, however.
I don’t think this line of discussion will lead us to what I suspect is where our real difference of opinion resides, that being the effect of changing the level of excess reserves on the overall money supply. The side taken by most is that a tightening indicated by raising the fed funds rate (and now, by necessity, the IOR rate) first impacts lending and economic activity, and that then feeds back into the money supply, causing it to drop.
I take the side that an increase in total reserves (via an addition to the excess reserves in the system) directly leads to money being created which then feeds first into financial markets and later into economic activity. The reverse of the cause and effect described in the first case. Of course, that is not the case when banks are paid to hold onto their excess, as they have no incentive to then circulate them. For it’s the circulation that generates the increase in money supply.