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How Bank Reserves Became a Policy Tool
Description
Episode 4 of Monetary Policy Explained digs into a subtle but powerful shift: how central banks stopped treating bank reserves as a passive byproduct of lending and turned them into an active policy lever. Lucas and Luna walk through the mechanics of reserve remuneration, the role of the interest on reserve balances (IORB) rate, and what changed after 2008 when the Fed started paying interest on reserves. They discuss why this matters for money markets, how it affects the transmission of rate hikes, and what the current reserve glut means for future tightening cycles. Specific numbers include the effective federal funds rate versus IORB spread, the roughly $3 trillion in reserves sitting on bank balance sheets as of early 2026, and the mechanics of the overnight reverse repo facility. No vague macro chatter — just how the plumbing actually works.