Reserve Balances Vs. IOER

The Reserve Balances at the Fed have been skyrocketing to $4 trillion. The higher this becomes, the higher the IOER needs to be. A hike in IOER is disinflationary as it incentivizes banks to hold more capital at the Fed (IOER serves as a proxy for the fed funds rate).

On the chart below we see that when the excess reserve balance goes higher, either the IOER needs to increase or the Fed Funds Rate needs to decrease.