The primary reason for shifting to paying reserves over allowing the free market to set interest rates, is to create a stable pool of liquidity at financial institutions. The “Interest on Excess Reserves” or IOER instrument might be used instead of the Federal Funds rate if the Fed cannot or is unwilling to remove excess reserves from the banking system. Trading has declined in the Federal Funds market.
- Why is the FOMC considering changing their primary instrument at this time?
- How and when would the FOMC decide on returning to their previous instrument?
- Is there a permanent role for continued future use of the IOER instrument? If other countries have tried this instrument, what has their track record been?