Sterilization is usually discussed in the context of currency intervention, but it’s functionally the same when a central bank wants to drain cash from the system.
It’s the process of selling longer-dated assets in exchange for zero-maturity money. This locks money up for a time, effectively removing it from current circulation. Usually, this would be done by selling off some of the Treasuries on the Fed’s own books for cash. The Fed will take the cash it receives and sit on it.
If the Fed doesn’t own enough treasuries, it might not be able to do this in large enough scale on its own. Now, the Treasury could just issue more treasuries and sell them to the Fed.
But the new ability to pay arbitrary interest rates to banks on their deposits is quite similar and can be used for sterilization. The banks deposit their cash with the Fed, which locks it up, taking it out of circulation.
The big difference is maturity: these deposits are generally just overnight, while a Treasury has a much longer term, up to 30 years, but with whatever maturity the government wants. Perhaps the Fed could start offering CD’s, essentially, to remove even this distinction...
