Last week I discussed the tools that the Federal Reserve will be using to raise short-term interest rates as we enter the next phase of U.S. monetary policy. In brief, the Fed plans to use interest on reserves and reverse repurchase agreements as an offer to borrow back Federal Reserve deposits at an annual rate between 25 and 50 basis points (0.25% to 0.50% interest per year). That offer from the Fed puts an effective floor under the fed funds rate, which is the rate at which institutions would lend these funds overnight to other banks. When the Fed raises its offering rate, the fed funds rate should go up with it. Today I look at the implications of these new procedures for the Fed’s balance sheet.
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