The Federal Reserve’s paying interest on bank reserves as well as selling to banks treasuries overnight, which in practice means paying banks so they lend less, is becoming more expensive with the Fed’s recently initiated series of interest rates hikes. Over the past four weeks, the central bank dished out nearly $1.5 billion to financial institutions that keep with the Fed their cash stockpiles and buy its bonds overnight. That number could multiply in the coming months.
With the gargantuan federal spending during the COVID-19 pandemic, banks have amassed an unprecedented hoard of cash reserves—money deposited by their customers. Normally, such reserves would be a dead weight on the banks’ balance sheets, not put to any productive use. Banks would thus try to lend against it and invest it, making it circulate in the economy.
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