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Interest on excess reserves is currently at 0.15%, but the yield on 1, 2, 3, and 6 month Treasury bonds are all only 0.05%. Why is this the case? Shouldn't IOER be about the same if not lower than the shortest Treasury since it's basically just a savings account for banks?

Furthermore, I understand the fed has been doing a lot of reverse repos lately to lower the money supply. But couldn't they just lower IOER to below short term bond yields instead? This would disincentivize holding excess reserves, causing banks to buy treasuries, lowering the money supply. This way of doing it would be way cheaper for the fed (aka taxpayers).

The only explanations I can come up with are either:

  1. The fed wants to keep banks liquid in case there is any sudden increase in demand for money, and reverse repos allow the fed to decrease the money supply while retaining the option to increase it in an instant if needed.
  2. The fed is giving banks money for free because the system is corrupt.

TLDR: Why is IOER > short-term treasury yields while the fed is doing reverse repos at the same time?

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IOER is only available to deposit taking banks , whereas TBills are available to everybody. Therefore a holder of TBills cannot simply choose IOER instead in order to get a higher yield. This means that a modest spread can develop between the yields.

The Fed’s problem in recent months is to keep all short term rates within the 0-25bp band that is the policy rate. Due to the large amount of excess reserves, many short term rates have been moving to the lower end of the range. Hence , they set up the reverse repo facility to absorb some of the excess reserves, and they also (in June 2021) raised IOER slightly in order to tweak all short term rates up.

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