That will depend on the Fed’s decision to continue paying interest on reserves (also a post-GFC policy) and where it wants to keep interest rates. It’s my view that massive reserve balances will continue to be the ‘new normal’ so long as the Fed pays interest on reserves and wants to keep the bank rate low, which I think is likely. This isn’t necessarily a bad thing since the expansion in reserves itself is not inflationary.

In reality, the treasury could stop issuing bonds altogether and let the bank rate settle on the ‘natural’ rate of 0% (since reserves would not be drained via bond issuance). I consider treasury bond issuance a form of corporate welfare since all it really does is give banks an opportunity for guaranteed higher returns. But there’s room for debate on that.

Corporate accountant and former auditor with degrees in philosophy and accounting.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store