WASHINGTON (MarketWatch) - The Federal Reserve will one day use its new power to increase the interest rate paid on the $1.5 trillion in reserves sitting in banks' balance sheets to keep them from leading to higher inflation, said John Williams, the president of the San Francisco Federal Reserve Bank, on Monday. In a speech to the Western Economic Association International meeting in San Francisco, Williams said that the traditional textbook view that these reserves will overheat the economy and lead to higher inflation once the economy recovers are "outdated." The Fed will likely raise the interest rate on reserves as it raises the target federal funds rate, Williams said. If banks are happy to hold excess reserves as an interest-bearing asset, then the money multiplier on those reserves can be close to zero, he said.
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