As regards the first of these goals, we want to build on the major integration projects that have come before and promote the emergence of European initiatives that can strengthen Europe’s payment market. Right now, just one initiative looks capable of providing a satisfactory response to the challenges: the European Payments Initiative, or EPI. With this initiative now under way, we feel that it is vital for EPI to make good on its promises. On the experimental front, the Banque de France is currently conducting a programme exploring the use of a central bank digital currency (CBDC) to settle interbank transactions, to assess to what extent and under what conditions such a currency could make the settlement of financial-asset transactions safer and more efficient, while at the same time preserving the fundamental role of central bank money in the proper execution of these transactions. The Banque de France is also playing a very active role in the Eurosystem work, under the aegis of the ECB, on a retail digital euro. An ECB report published in October 2020 said that the Eurosystem should get prepared for the swift introduction of a retail digital euro should the need arise. The Eurosystem held a public consultation that closed in late January, attracting over 8,000 responses. The input from this will inform the meticulous examination of the reasons, consequences and prerequisites for the potential introduction of a CBDC that we are conducting.
That is because the Federal Reserve has committed itself to supply sufficient reserves to keep the fed funds rate at its target. If banks want to expand credit and that drives up the demand for reserves, the Fed automatically meets that demand in its conduct of monetary policy. In terms of the ability to expand credit rapidly, it makes no difference whether the banks have lots of excess reserves or not. Another source of concern among some market participants has been the Federal Reserve’s purchase of Treasury securities. The worry here is that the Federal Reserve’s purchases are “monetizing the debt” and that therefore these purchases will ultimately prove inflationary. 4  In a world of excess reserves and a positive IOER, either the IOER or the fed funds rate could conceivably be used as the primary instrument of monetary policy. The Federal Reserve would have precise control over the IOER and this would lead to some variability in the actual fed funds rate. This would not be much of a departure from the recent past in which the actual fed funds rate has tended to fluctuate closely around the fed funds target. BIS Review 94/2009  5  Regarding the Fed’s Treasury purchase program, I want to make two points. First, with the fed funds rate constrained at zero lower bound, policymakers needed to find other ways to stimulate economic activity.