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Quantitative easing (QE) is essentially a large-scale form of open market operations, in which the Fed buys large amounts of treasury bills of all maturities (ranging from 1-month to 30-year) and mortgage-backed securities from commercial banks. By doing so, they are crediting these depository institutions with large amounts of electronic money. Thus, wouldn't there be a large expansion of the supply of federal funds in the federal funds market as a result of QE? And hence, wouldn't the federal funds rate keep on decreasing, even below zero, as the Fed's massive "QE infinity" programme continues?

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  • $\begingroup$ Regardless of how much money I put in your bank account, it does not incentivize you to lend out your deposit at a negative rate (unless your deposit is charged a negative interest rate, as in the case of, e.g. the ECB, Swiss National Bank, and Bank of Japan). $\endgroup$ – Michael Jun 8 at 12:25
  • $\begingroup$ As for open market operations, the Fed distinguishes between temporary and permanent OMO's. Temporary OMO used to influence the fed funds rate involves overnight repo agreements. On the other hand, permanent OMO used to implement QE consists of outright purchase of securities. $\endgroup$ – Michael Jun 8 at 12:26
  • $\begingroup$ @Michael So you are saying that if the Fed really wished to lower interest rates even further, they would have to engage in more overnight repo agreements? I presume that since interest rates are now in a window between 0 and 25 basis points, the Fed is no longer engaging in overnight repo agreements? $\endgroup$ – Tan Yong Boon Jun 8 at 13:13
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At the time of writing this answer, the Federal Reserve pays 0.1% on reserves: link to Fed webpage.

Banks have no incentive to lend Fed Funds at rates below 0.1%, as they can keep the excess reserves and earn a higher rate of interest.

Interest rates are largely set by price signals made by central banks, not quantities.

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  • $\begingroup$ Yes, so price signals would be from changes in demand and supply right? So if supply increases massively, wouldn't there be a price signal downwards, instead of it remaining at 0.1%? $\endgroup$ – Tan Yong Boon Jun 7 at 23:34
  • $\begingroup$ The 0.1% is an administered rate, fixed by the Fed. They can put it at whatever level they wish. $\endgroup$ – Brian Romanchuk Jun 8 at 1:20

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