Cutting the interest on excess reserves (IOER) rate may seem like a simple way for the Fed to signal its intent to leave short rates at near-zero for several more years, at the same time as it begins to taper its asset purchases. However, even a small reduction could trigger a sequence of potentially troublesome events. If the Fed is determined to cut the IOER rate it might make sense to leave the rate payable on required reserves unchanged at 0.25%. That would at least give banks an incentive to expand their balance sheets by making more loans.
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