Comment: Reserves are never drawn

(See in situ)

In reply to comment: You claim that "reserves (see in situ)

Reserves are never drawn

Reserves are never drawn down. Credit expands, and this effects the Fed's reserve requirements Those are fed requirements not market requirements. And since the Fed is managing its monetary policy via a target rate, they are obliged to add reserves to hit that rate.

There was a time when they targetted money supply. Or they could target a gold price, or anything.

Lower overnight rate for interbank borrowing - does it lead to increased loan demand? Marginally, yes. But we are near zero on the fed funds rate, and if they stopped paying interest on reserves, it would likely fall to just above zero. In real terms, overnight rates are negative. There is cleary such a dearth of profitable investment oppurtunities for borrowers, and/or creditworthy demand for loans, that all the trillions in excess reserves sit there.

However, whether the excess reserves are there or not,m it has no effect on the amount of credit out there, because the banks don't worry about reserves when making loans. They know they can get bank reserves at the Feds target rate no matter what, so the only thing they look at is there capital levels, and the credit of the potential borrower. They never look at reserves.

Again, many central banks have no reserve requirements. It is an artifact of the gold standard when reserves were necessary.

So there is no contradiction. The Fed could just suspend all reserve requirements, or they could add ten trillion in reserves and let rates fall to zero, and it wouldn't have any impact on the issuance of loans. You'd just end up with 10 trillion in excess reserves.

The Fed stands ready at all times to provide sufficient bank liquidity to maintain whatever rate they're targeting. Its just the chosen method of managing interest rates. It could be done in any number of ways.