The Federal Reserve created a lot of digital currency in 2008. Ben Bernanke hit the CTRL-P button a few trillion times to buy worthless OTC derivatives. The banks have taken that money and deposited it back with the Fed. We now have a mountain of excess reserves. About 2.1 trillion (Whats a few billion between friends). Take a look see:
The federal reserve now pays interest on excess reserves (IOER). Banks have not lent out this money. Why not? Well, they get money risk free. They do not feel it’s worth it to loan out this money…yet.
As interest rates begin to rise banks will be tempted to deploy this cash. This will affect the money supply in a huge way. There is not a single person on the planet, least of all the people at the federal reserve, who fully understand how all of this is going to play out when they try to unwind there massive balance sheet.