A Tribute to the Thoughts of Another and his Friend "Everyone knows where we have been. Let's see where we are going!" -Another
Basically, the Fed controls interest rates by controlling the supply and demand of bank reserves (i.e., Fed liabilities). Before 2008, there was a naturally-low demand for reserves, and the Fed adjusted that low demand in two ways, by capping the rate banks paid for extra reserves when needed, and by adjusting reserve requirements. It controlled the supply of reserves in the system through open market operations, where it could increase supply by buying securities, or decrease supply by selling securities (
The Floor with High Balances approach is essentially how the Fed ended up conducting monetary policy starting in October 2008… The Fed continued to conduct policy using a floor system as successive rounds of QE increased the quantity of reserve balances further. It then officially adopted the floor system implementation approach in January 2019 (see “ Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization ”). When the staff evaluated a floor system in 2008, they envisioned a much