A lot of people have been saying the Fed can't raise rates that much or, the market won't let the Fed raise much or the economy won't or whatever. That's all bunk. None of those things matter, however, we can construct a model of just how far the Fed can raise rates, based on the knowledge that they must pay interest on reserves OUT OF THEIR OWN EARNINGS!
First let me mention that the Fed turned over $100 billion to the Treasury in FY 2015, so we know how much the Fed earns: $100 billion. That's how much it earns so that's how much it can pay.
On a portfolio of assets of $4.5 trillion, the Fed is earning about 2.2%. Actually, maybe a little bit more because its making most of its money on holdings of government securities ("those babies" in the words of Alan Simpson) and that amounts to $4.2 trillion so that's a return of 2.4%.
There's $4.5 trillion in reserves (equivalent to the Fed's assets by definition).
So the answer to how high the Fed can raise is 2.4%. That's it. After that it's out of money and you know DAMN WELL that there is no way Janet Yellen would go to Congress to ask for money to pay interest. NO WAY.
When the Fed didn't have to pay interest on reserves it was the Treasury's expense, but Ben Bernanke, in all his wisdom, convinced Congress back in 2008 that HE wanted that expense for some reason. Not exactly a Donald Trump, art of the deal, move. Before that, the Fed had the power to raise to infinity. Again, Treasury was on the hook to pay.
So, there's the answer to that question for anyone who is wondering. The maximum the Fed can raise is 2.4%. After that, it's literally out of money.
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