CHART OF THE WEEK

 

Paying Interest on Reserves Diminishes Private Banks’ Incentive to Lend

 

 

Many central banks, such as the Bank of Canada and the Federal Reserve, pay interest on the excess reserves (IOER) maintained by private banks. When the Bank of Canada briefly set its IOER rate equal to its policy rate (a floor system) Canada’s ratio of excess reserves to private bank deposits skyrocketed. However, this reversed upon resetting its IOER rate below its policy rate (a corridor system). When central banks set their IOER rate below their policy rate banks choose to hold few excess reserves preferring instead to lend these funds at relatively higher interest rates.

In the United States, the Federal Reserve has set its IOER rate equal to (or higher than) the fed funds rate since December of 2008. Between 2002 and 2007, banks maintained only $1.7 billion of excess reserves. As of October 2017, they now hold $2,129 billion in excess reserve. 

The payment of interest on reserves will likely be a topic at this week’s hearing on the Economic Outlook with Federal Reserve Chair Janet Yellen. John Taylor has a short article discussing his rationale for setting IOER below the fed funds rate here.

 

LAST WEEK

News & Commentary Weekly Highlights

MarketWatch: Mortgage rates head lower ahead of big decisions from Fed, Congress

Bloomberg: Yes, a Corporate Tax Cut Would Increase Investment

Bloomberg: The End of Net Neutrality Isn't the End of the World

Wall Street Journal: Mugabe’s Reign Ushered In Zimbabwe’s Economic Decline

 

Top Economic Indicator Highlights

No Major Releases

 

THIS WEEK

Upcoming JEC Hearing

The Economic Outlook with Federal Reserve Chair Janet Yellen (Wednesday, November 29 at 10:00am, Longworth House Office Building Room 1100)

 

Upcoming Economic Data

Monday

New Residential Sales (10:00am)

Dallas Fed Manufacturing Survey (10:30am)

 

Tuesday

Revised Building Permits (8:00am)

Advance Economic Indicators (8:30am)

Consumer Confidence Index (10:00am)

Philly Fed Manufacturing Survey (8:30am)

Dallas Fed Texas Retail Outlook Survey (10:30am)

 

Wednesday

Gross Domestic Product (Second Estimate) (8:30am)

Pending Home Sales (10:00am)

Federal Reserve Board of Governors Beige Book (2:00pm)

 

Thursday

Personal Income/PCE Deflator (8:30am)

Chicago Purchasing Managers Index (9:45am)

 

Friday

Construction (10:00am)

ISM Manufacturing (10:00am)

Motor Vehicle Sales (4:00pm)