How the US Federal Reserve intends to raise rates

Excellent article on how the Fed will increase rates.  From the article:

The US central bank has maintained the effective Fed funds rate as its primary interest rate target at the upper end of a zero to 0.25 per cent corridor. Called “interest on excess reserves”, or IOER, this lets the Fed pay interest on money held at the central bank and when policymakers vote to lift interest rates, this IOER rate will presumably be lifted to 0.5 per cent.

In theory, this should drag the effective Fed funds rate up to this level, as banks should not be willing to lend to other financial institutions at a rate lower than what the central bank pays. But only actual banks have access to the IOER, and there are many other lenders in the Fed funds market that in practice have dragged the effective rate well below where the IOER is set.


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