This is the Cato Daily Podcast for Thursday, December 17, 2015.

I'm Caleb Brown.

The Federal Reserve has raised its target for banks lending to each other and it's raised the

rate it pays banks for holding excess reserves.

George Selgen, director of the Kito Institute's Center for Monetary and Financial Alternatives,

says the former is largely meaningless and the latter actively damaging.

We spoke after the Fed announcement yesterday.

In the good old days before the crisis, when the Fed would announce a different target for the federal funds rate, it was able to actually

achieve that target by buying or selling government securities which should either increase or reduce the available supply of bank reserves.

And so that would mean that the rate at which banks lend to each other overnight would be influenced by how readily available reserves

were.

The problem is that during the crisis, the Fed essentially lost control of the federal funds right and despite its various efforts to maintain that control

the Fed found that the target it was setting or trying to set for the federal funds rate,

the target that it announced, was no longer related to the actual rate of interest at which banks were in fact exchanging reserves,

trading reserves on the overnight market which had fallen below the target.

So the Fed, for example, for some time in 2008 had set the target federal funds rate at 2%, but no trading was taking place at 2%,

whatever trading was taking place below that. The situation has essentially remained that way right up to this

time. So there is a there was before today's decision a federal funds rate target but nothing was happening at

that rate in the overnight market so we could say that the target was above whatever the true

equilibrium interest rate was at which trading on the federal funds market

would take place.

And now they've doubled that.

...