I'm not sure the I understand the theory that the Fed's interest on reserves can be used to prevent banks from lending out excess reserves.
If the fed were to hike IoR to 1%, banks would keep cash sitting at the fed only to the extend that other market interest rates did not go up by similar amount, if market rates went up by more than the jump in fed funds(a resonable scenario as the market tries to price in future tightening), then margins for lending would expand and banks would lend more
I suppose the bank would like keep the cash sitting IF they were getting decent
real returns there, but that begs the question, if the real returns are high on reserves at the fed, that means inflation is low(possibly close to 0%), which case that fed would not be hiking. Also the real returns on lending would also be quite high
There is little historical connection between the fed funds rate and bank lending, I'm not sure there will be one between IoR and lending
http://www.hussmanfunds.com/html/fedirrel.htm
This is an interesting article by hussman, where I disagree with hussman is that even though the fed cant control bank lending they can control the overall level of short-term
real interest rates which have an actual impact in the economy. The fact that the fed 'follows' the market simply shows that the fed is behaving well and is not trying to overly stimulate or break the economy(although they do that on occasion). They dont have to follow the market, if they wanted 0% rates for eternity they could do it but after the short-term boost and a long refusal to 'follow' the market, inflation would pick up. So would the needed amount of monetary base created to keep overnight rates at 0%
Or, as Henry Kaufman said, in a deregulated world, the Fed rations credit not by restricting supply, but rather bankrupting the borrower by jacking the price
