Uggghhh. Zerohedge!. Is there anything they understand before they weigh in on a topic? The Fed began to pay a small interest on reserves during the financial crisis in order to put a floor under the Funds Rate and hold it above zero. As long as there are net excess reserves, the funds rate, which is a negotiated rate among banks, will plummet rapidly toward zero if no interest is paid on excess reserves. The Fed normally uses reserve balances to target a funds rate, which you can think of as the wholesale price of money for banks. When there are excess reserves the Fed would typically drain them by selling Treasuries. However during the Banking Crisis and QE they were net buying Treasuries while demand for Credit was drying up. The Fed intended to drive rates down dramatically, but they wanted to maintain a wholesale rate slightly above zero. To prevent rates from going all the way to zero in the face of swollen reserves and QE the Fed decided to pay a small interest on reserves. Even though the Fed is now both tightening and unwinding they may need to continue paying interest on excess reserves for a considerable time (years) as a part of their mechanism for targeting a Funds Rate. Let us not lose sight of the magnitude of the Great Recession, it was a calamity of gigantic proportions. Note that there are other mechanisms that can be used to maintain a target price for bank money other than the reserve requirement adopted by the U.S. Central Bank. See, for example, Canadian or Australian Central Bank operation. Also please note the too common use of unlabeled axes in Zerohedge Graphs. The best advice I could give anyone is never bother to read a zerohedge article on anything. They are way too often a pernicious intermingling of truth and untruth . I wonder if their parent organization is headquartered in St. Petersburg.)
Can you wrote a book on current monetary policy? I'll buy it once you're done. Ok serious question... Did the Fed ever unwind all the "toxic debt" it bought in 2008? They still have it on their books???
You can check out the Fed balance sheet for yourself. It is part of the public record and kept up to date in virtual real time on the internet. Toxic debt was toxic only to banks that could not mark it to market when the market for it dried up. The Fed bought it at a discount realizing it was not worthless, but just ill-liquid. Then they credited the banks reserve accounts with the proceeds. The debt instruments bought by the Fed were not toxic to the Fed. They continue to make a profit on those instruments as they unwind them. The profits, after Fed operating expenses, flow entirely back to the U.S. Treasury. The Fed and the U.S. Treasury are really one U.S. government operation, which can be discerned by considering the consolidated Fed and Treasury balance sheets. The Fed Governance and in particular the FOMC are made to appear as operations independent of Treasury, and are to some extent, for the purpose of trying to isolate monetary policy decisions from political pressures. Nevertheless, in reality the Federal Reserve and the Treasury must work together hand in glove on a daily basis.