Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

Okay. Let me take them in reverse order. I don’t like to give up, but if I could just exclude that portion of it, it’s possible that you might want to consider the interest rate on reserves or some reasonable facsimile thereof as your target because that is essentially the risk-free rate that banks face. That may be the purer measure of what you’re really trying to accomplish in terms of its link to monetary policy than the federal funds rate. It’s possible. There are obviously important governance issues that surround that choice, though, in terms of what’s the Board’s prerogative and what’s the FOMC’s prerogative. But that’s a completely reasonable thing to think about, just as long as we don’t characterize that as giving up.

Have we added enough reserves to drive the federal funds rate down to the interest on reserves? Well, I think not. I wouldn’t look at it quite that way because the gap in principle, if other things are not going on, should be the difference between us as a counterparty and a bank as a counterparty. One is an unsecured loan between one bank and another bank, and the other is us as the counterparty. So normally there should be a spread between the interest on reserves and the federal funds rate. Now, obviously what complicates that in the current environment is the Federal Deposit Insurance Corporation’s guarantee on interbank funds going forward. So federal funds may be covered—in fact, they look as though they could be covered by that guarantee. In that circumstance, one might argue that the federal funds rate and interest on reserves should probably be the same rate because there’s no difference in credit risk.

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