Question

In light of recent trends, what can be done when the money created by the Federal Reserve tends to be used as excess reserves rather than for making loans?

Answer 1

Banks are holding excess reserves than required reserves as the cost of lending is higher than interest from FED because of prevailing uncertainty in the market. But by holding the excess reserves the money supply decreases which reduce the growth of the economy. So in order to motivate banks to lend more, the reverse repo rate needs to be decreased, so that banks would find lending as lucrative more than holding excess reserves. (Reverse repo rate is interest rate earned by banks by holding excess reserves)