The textbook I’m reading says that the reserve ratio is like the biggest “tool” that the fed has. They are increasing interest rates, but then they are having the reserve ratio at 0% and they are engaging in reverse repo to make sure that banks have plenty of cash. I don’t get it.
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They had to change it because they dumped $6 trillion into the banking system and then dropped interest rates to 0%. The whole purpose was to get that money flowing since liquidity came to a standstill at lock downs.
Now that interest rates have been jacked up, if they were forced to hold those reserves, they would quickly go broke, paying out deposit interest. Instead, they can deploy that capital, and it incentives them to buy US treasuries. Basically, it added artificial demand to keep the government funded.
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