[jhulla]

The problem is that the Fed must corner the market in Fed Funds in order to meet their objective. They must set the price floor. In the past, this market was small and controlled by the Fed.

Now in ZIRP, the Fed claims they will solve this problem by doing reverse repos with a wide array of counterparties. The list of counterparties is here: http://www.newyorkfed.org/markets/rrp_counterparties.html

Their current limit is $300B - what happens when say, $4 trillion dollars shows up asking to be paid at the Fed's targeted rate. If the rate were 0.5%, that would be $20 billion a year that the Fed would need to pay out. If they limit it to the first $300B, then they cannot hold the rate at 0.5%. Can the Fed pay $20B in interest a year?

IMHO, long way of saying, after taking the economy to ZIRP, the Fed has to find a safe way to drain the system of excess reserves before they regain control of Fed Funds.