“Cleveland? Yes, I spent a week there one day.” As someone who proudly called Cleveland home for seventeen years, that one’s not usually one of my favorites. But lately, I have to say, I’m getting to know the feeling. Financial markets? Yes, I spent a year there one month.

I could have in mind any number of developments, but what I’m thinking about today is the announcement on October 6 that the Federal Reserve would commence paying interest on funds that depository institutions hold on reserve with the central bank. Initially, the interest rate that applied to these balances was the target federal funds rate less 10 basis points (or 0.10 percentage points) on required reserves and 75 basis points (or 0.75 percentage points) on excess reserves. On October 22, the Board of Governors of the Federal Reserve announced that the rate paid on excess reserves would be raised to 35 basis points below the funds rate target. Last week the Fed announced that, henceforth, “the rate on required reserve balances will be set equal to the average target federal funds rate over the reserve maintenance period. The rate on excess balances will be set equal to the lowest FOMC target rate in effect during the reserve maintenance period.”

This last change may seem small and technical — and I guess, in a sense it is — but it is one with some fairly consequential implications. I could explain, but I could hardly do better than the prescient article appearing in the FRBNY Economic Policy Review, written by New York Fed economists Todd Keister, Antoine Martin, and James McAndrews. If you’re a teacher — or otherwise have to explain this stuff to the uninitiated — the authors provide three mighty nice graphs. First the traditional stuff:

“We begin by examining the total demand for reserve balances by the U.S. banking system. In our stylized framework, this demand is generated by a combination of two factors. First, banks face reserve requirements. If a bank’s final balance is smaller than its requirement, it pays a penalty that is proportional to the shortfall. Second, banks experience unanticipated late-day payment flows into and out of their reserve account after the interbank market has closed.