eligible to receive interest on their deposits with the Fed. C. There is not enough competition among banks to drive the federal funds rate up to the interest rate the Fed pays on reserves. D. Competition among banks to obtain funds on the federal funds market drives the interest rate the Fed pays on reserves.
According to an article in the Wall Street Journal in June 2016, Congressman Jeb Hensarling of Texas, chair of the House Financial Services Committee criticized the Fed for paying banks an interest rate on their reserves that was higher than the federal funds rate.
Source: Kate Davidson,
open double quote“House
Republicans Grill Janet Yellen on Fed
Operations,close double quote”
Wall Street
Journal,
June 22, 2016.
Why isn't the Fed able to set the interest rate it pays banks on reserves equal to the actual federal funds rate?
A.
Only banks can borrow and lend in the federal funds market.
B.
Financial institutions such as Fannie Mae can borrow and lend in the federal funds market, but are not eligible to receive interest on their deposits with the Fed.
C.
There is not enough competition among banks to drive the federal funds rate up to the interest rate the Fed pays on reserves.
D.
Competition among banks to obtain funds on the federal funds market drives the interest rate the Fed pays on reserves.
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