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Pro tip: the Federal Funds Rate is not the cost of capital ft.com/content/46c4b1… “'How can slightly less than a dozen people meeting eight times a year decide what the cost of capital should be versus some kind of organically, market supply determined rate?' Ms Shelton said."
Pro tip: the central bank's most basic mission is to ensure the payment clearing system functions. Setting interest rates is a side effect of it. ft.com/content/46c4b1… "If appointed to the board, she would be “asking tough questions” about its most basic mission, she said." 2/-
She doesn't want the Fed to turn banks into utilities. They are utilities. She wants the banks to lend reserves instead of the Fed paying interest on reserves. Banks don't lend reserves. 3/-
The federal funds rate is not the cost of capital but the cost of overnight liquidity. It is very close to the cost of collateralised (repo) lending. It is questionable whether the Fed can set that very far away from where market supply and demand would put it 4/-
What the Fed aiming for a Fed funds rate by open market operations actually does is reduce the volatility of the short end of the interbank lending curve 5/-
If the Fed funds rate drifts higher than the target, the Fed can do one of two things. Tolerate it by raising its interest rate target, or buy US Treasuries in open market operations to increase reserves and liquidity and thus lower the Fed funds market equilibrium rate 6/-
Similarly if the Fed funds rate drifts lower than the target the Fed can tolerate it by lowering the target or pull it back by selling Treasuries 7/-
This is subordinated to providing enough reserves to ensure smooth payment clearing and settlement between particioating banks. It has nothing to do with the cost of capital 8/-
As to paying interest in reserves, it is necessary in the context of QE because setting a target for Fed holdings of US Treasuries means they are no longer free to be used in open market operations to set the Fed funds rate 9/-
If you want to know more, read @stf18 modernmoneynetwork.org/content/modern… and @tymoignee #LearnMMT 10/10
