5 things to know about quantitative easing in the United States

As part of the stimulus the Fed has flooded the financial system of trillions of dollars. Through a soft monetary policy, American central bank is trying to determine how and when to raise the benchmark interest rate. At the same time, the Central Bank was faced with unforeseen consequences, including strong growth in deposits of foreign banks at the Fed.

Understand all of this, of course, difficult. Here are some answers to frequently asked questions.

What is a reserve?

This is money that banks keep on deposit with the Fed. Part of the money have to be on deposit at the Fed, and the remaining funds the bank provides loans and investments.

Why are so many reserves?

The Fed has created these reserves due to the policy of quantitative easing, in which long-term interest rates are at a low level. On the Fed’s balance sheet is more than $ 4 trillion of mortgage and Treasury bonds. Buying bonds, the Central Bank lends to banks. Those, in turn, on the money from the Central Bank to lend to the consumer sector. Assets purchased by the Fed, which need not be stored on the Fed’s balance sheet called “excess reserves.”

Why foreign banks hold so much money on deposit at the Fed?

Foreign banks with large balance sheets, are now faced with lower costs of regulation in the United States than similar American. In this regard, foreign banks are more willing to receive funds at low interest rates close to zero and transfer the money to the Federal Reserve’s interest rate of 0.25% per annum. Many foreign banks also faced a shortage of dollars during the financial crisis, and want to increase the stock of the American currency in their accounts.

How the Fed controls interest rates?

Before the crisis, only a small part of the reserves the Fed uchuvstvoval in the financial system. Through these operations, the Fed raises and lowers interest rates. At the moment, you have a huge amount of excess reserves, the Central Bank can not use the strategy of increasing or decreasing reserves. To changes in interest rates in the future, the Fed will adjust the interest rate on these reserves. When the Central Bank raises interest rates on deposits, banks will be less willing to lend, if they find a higher rate elsewhere. It is expected that the loans will become more expensive over the place.

What could go wrong?

Banks are not the only financial institutions. Many other finorganizatsii – mutual funds money market, Fannie Mae, Freddie Mac, as well as investment banks – have large cash reserves. Management of interest rates outside the banking system seems to be problematic for the Fed. Officials have developed a new tool called the overnight rate on a reverse repo, by which the Fed will pay nonbanks on reserves. But untested tool, in connection with what officials fear to use it actively.

Another problem. When the Fed raises interest rates, while its costs are rising, which may reduce the profit regulator, which it sends to the Treasury of the United States. The increase in interest payments to foreign companies would be politically unpopular for the Fed