I usually disagree with Rick Santelli, who’s a monetary hawk right now. But in this interview he clearly explains why the Fed needs to do so much QE: the money market industry.
Back in late 2008 a few money market funds got into trouble and were in danger of “breaking the buck.” That’s due to their policy of pricing each share at $1. The solution is to allow the price to fluctuate. The Fed should have given the industry 6 months to prepare for negative interest rates. Instead they bailed them out and propped up interest rates at 25 basis points, in order to insure they would never break the buck.
If not for the money market industry the Fed could have already cut the fed funds target to around negative 0.25%, and the same for the interest rate on reserves. In that case (and assuming the IOR also applied to vault cash) it’s likely that most of the ERs would exit the banking system and end up in safety deposit boxes. But three trillion dollars is a lot of Benjamins, and despite the cash hoards you observe in places like Japan, a more likely outcome would have been hyperinflation. Obviously that would not be allowed, so what this thought experiment really shows is that with that sort of negative IOR the Fed could have gotten the stimulus it wanted with much less QE.
Santelli is one of the few people who understands the real reason for the massive QE program. Kudos to CNBC. (Louis Woodhill also frequently discusses IOR.)
PS. On balance I’d prefer the old policy of no IOR, rather than negative IOR. But negative IOR is preferable the current sluggish recovery in NGDP.