The Fed is the Monopoly Supplier of Net Reserves to its Banking System; Therefore, has no Option But to Set at Least One Interest Rate
In: Flash Cards
Explanation why: The reserves of the banking system exist in only one single form: deposits at the Fed. Banks ‘own money’ when they own a deposit at the Fed. Banks make payments by transferring their credits. New deposits at the Fed can only come into existence as a result of Fed or US Treasury actions, such as lending reserves, making payments to the private sector, paying interest to the private sector, cashing tax revenue.
The Fed is thus in a position to set an ask and a bid price on anything it wishes; since it has an unlimited power to credit banks, unless this power is self-constrained.
When it bids for, say, 1-week loans to banks, it sets the interest rate on weekly loans.
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