Clearly, interest rate policy implemented by the Fed’s current operating procedures could not survive in this case. If the Fed persisted in implementing interest rate policy with its current procedures, the Fed would continually sell securities to withdraw reserves and currency. Reserves, for example, would be withdrawn to keep their marginal narrow liquidity services yield from falling below the interest opportunity cost represented by the federal funds rate target. If the transaction demand for reserves disappeared completely, the Fed would end up withdrawing all bank reserves in defense of its federal funds rate target and lose its power to influence.
