“Banks find it difficult to cut interest rates on customer deposits below zero, because customers have the alternative of moving their funds into physical cash, which does not bear interest although it can incur storage costs.”
Can’t banks borrow from the federal reserve at next to nothing? So what if I don’t loan them $1,500 per year?
If not arguing the point, just hoping someone will explain it to me in a way I understand.
Answering your question:
Banks don’t ordinarily borrow from the Federal Reserve except as a window of last resort. They are required to keep a % of their customer deposits on deposit in the Federal Reserve System, which is used to clear transactions between banks.
Sometimes banks need more funds on deposit, and sometimes they have too many funds at the Fed. They are allowed to purchase Fed Funds from the other banks having excess for an overnight period. Settlement tends to happen in late afternoon.
Regardless of the Fed’s announced interest rate, the Fed Funds market rate generally is more than that. The banks selling the funds make money on the overnight interest.
The Feds control the money supply by raising or lowering the % amount of deposits that have to be kept at the Fed.
Unless there’s a huge financial disaster, and they can’t get money from anywhere else, banks don’t get loans from the Fed’s discount window.