More on the Fed

The rate paid on excess balances will be set initially as the lowest targeted federal funds rate for each reserve maintenance period less 75 basis points. Paying interest on excess balances should help to establish a lower bound on the federal funds rate.

From the Federal Reserve. While they say that paying interest puts a floor under the Fed Funds rate (for what reason, I don't know), I believe that the opposite is true. The Fed Funds rate will fall, making the interest rate worthless, unless they keep it at 1.25%. Actually, though, the actual rate the auctions are being done at are almost 0%. Case in point is today's open market operations. Cash was auctioned for Treasuries at a weighted average rate of 0.36%.

If the banks have any money left over, they can just leave it at the Fed for a 100% guaranteed 1.25%. I think this is a disaster.