<p>I am not sure about the institutional limitations on policies, but this is easily done in principle. Banks hold deposits at the Federal Reserve banks (reserves/excess reserves). If the Fed sets the interest rate on those deposits to a negative level, that pricing would ripple out everywhere.</p>

<p>For example, assume the rate was -1%. Banks would buy Treasury bills until their yields were comparable to -1%, as they could replace excess reserves with bills to reduce the cost associated with the negative rates. These lower rates then affect the traded yields of other instruments traded in the bond/money markets.</p>

CC BY-SA 4.0
2020-05-22T17:34:13.050Z
But why does Fed perform open market operations in order to change the Fed Funds rate, if it could just change interest on the reserves?
user12516963
CC BY-SA 4.0
2020-05-22T18:21:25.857Z
Also, what if Fed Funds rate is 0% and IOER is <0, couldn't banks just lend the money to other banks for 0% and avoid paying interest for their excess reserves?
user12516963
CC BY-SA 4.0
2020-05-22T18:48:30.910Z
Why do open market operations? The Fed’s operating procedures are complex, and there are arguments that they are too complex. As for the question about rates, banks would be unwilling to borrow at 0% if rates on excess reserves are at -1%. If there are excess reserves, there’s always a bank with an incentive to lend them out, and so the interbank rate will not be far from -1%.
Brian Romanchuk
CC BY-SA 4.0
2020-05-22T17:26:33.673Z
2020-05-22T17:26:33.673Z
Brian Romanchuk
<p>How can the Fed push Fed Funds rate to negative? I think I understand how it works with >= 0 -- they just lend reserves for bonds until they hit their targets, but what about &lt;0? Has this something to do with purchasing bonds until their yield becomes negative, making banks which hold bonds as cash to have negative interest on them?</p>

<interest-rate><federal-reserve>
How central banks "create" negative interest rates?
user12516963
# How central banks "create" negative interest rates?

(Asked by: username_0 on 2020-05-22)

How can the Fed push Fed Funds rate to negative? I think I understand how it works with >= 0 -- they just lend reserves for bonds until they hit their targets, but what about <0? Has this something to do with purchasing bonds until their yield becomes negative, making banks which hold bonds as cash to have negative interest on them?

**Tags:** interest-rate, federal-reserve


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## 1 answers

### Answer by username_1 on 2020-05-22. Score: 2 | Accepted answer

I am not sure about the institutional limitations on policies, but this is easily done in principle. Banks hold deposits at the Federal Reserve banks (reserves/excess reserves). If the Fed sets the interest rate on those deposits to a negative level, that pricing would ripple out everywhere.

For example, assume the rate was -1%. Banks would buy Treasury bills until their yields were comparable to -1%, as they could replace excess reserves with bills to reduce the cost associated with the negative rates. These lower rates then affect the traded yields of other instruments traded in the bond/money markets.

> **Comments:**
> **username_0**: But why does Fed perform open market operations in order to change the Fed Funds rate, if it could just change interest on the reserves?  
> **username_0**: Also, what if Fed Funds rate is 0% and IOER is <0, couldn't banks just lend the money to other banks for 0% and avoid paying interest for their excess reserves?  
> **username_1**: Why do open market operations? The Fed’s operating procedures are complex, and there are arguments that they are too complex. As for the question about rates, banks would be unwilling to borrow at 0% if rates on excess reserves are at -1%. If there are excess reserves, there’s always a bank with an incentive to lend them out, and so the interbank rate will not be far from -1%.  

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