"The increase will be executed by raising the interest rate the Fed pays on excess reserves held by banks to 0.5 per cent, effective on December 17, as well as the use of an overnight reverse repurchase programme."
This is from FT.com. I don't understand it. In order for an increase in rates to be transmitted throughout the economy, shouldn't the rates the fed CHARGES on excess reserves go up!?
If they pay banks more for reserves held at the Fed then surely the banks can then lower the rates they charge their customers?
They could, but why would they risk defaults on the loans to their customers for rates lower than 0.5% if they can safely get just that from the Fed?