Here we go again. Another meeting of the Federal Reserves monetary policy committee, and another press conference at which Chairman Jerome Powell will attempt to explain our actions and answer your questions. One question financial journalists should ask: Why is the Treasury about to start underwriting the Feds operating expenses?
The public may not be aware that when the Fed raises rates, it does so primarily by raising what it pays to commercial banks and other depository institutions on the reserves they hold at the Fedwhich are interchangeable with cash and effectively serve as checking accounts. These funds currently total $3.3 trillion. Since December 2008, they reflect accumulated purchases by the Fed of Treasury debt obligations and mortgage-backed securities. The Fed paid for its purchases by crediting the reserve accounts of the sellers.
Another $2.5 trillion in cash is held at the Fed through reverse repurchase agreements that the Fed conducts with a broad set of eligible counterparties, including money market-mutual funds and government-sponsored enterprises as well as commercial banks.
When the Fed announces a higher target range for the federal-funds rate (currently 1.5% to 1.75%), it implements its decision by raising what it pays both on reserve balances (currently 1.65%) and on reverse repurchase agreements (currently 1.55%). Money to pay for these interest expenses comes out of the Feds interest earnings on its own portfolio.