The mechanics of a graceful exit: Interest on reserves and segmentation in the federal funds market

► The Federal Reserve injected substantial liquidity to combat the 2008 crisis. ► The resulting increase in reserves caused federal funds to trade below the target. ► In response, the Fed introduced interest on reserves. ► But, funds still traded below the target and the interest rate on reserves. ► We explain why and show how the Fed can raise the funds rate in this environment.