@drsclark ER is the reserve capital of banks (banks’ asset) sitting on a Fed account, being paid IOER (1.95%) and can be taken out by banks at any time (and no longer get IOER interest accruals).
@drsclark ER is the by-product of QE a few years back. For example, when Fed created $1B new money and bought $1B-worth of UST from the market in a round of QE. some banks will be holding that $1B in their deposit account. They need to put back $100M to a Fed account to satisfy...
@drsclark Reserve requirement. But they can do whatever they want with the remaining $900M. (1) If they wrote $900M new loans, and some additional banks took the $900M loan money to create another $810M new loans, you get your regular money creation process.
@drsclark $1B Fed money —> $10B liquidity in the market. But (2) the banks can also choose to park the $900M in their Fed reserve account. The excess ($900M) will be paid IOER (1.95% right now).
So ER = frozen/stored QE money that has not been 10x-ed (money multiplier) via loans.
So ER = frozen/stored QE money that has not been 10x-ed (money multiplier) via loans.
@drsclark Roughly 50% of the QE money effectively never left the Fed, because of the weak demand of loans (claimed by banks). But Fed does pay IOER interest to the banks for holding the money that was created by the Fed in the first place.
