Another Tool for the Fed ?

Tuesday, May 06, 2008 | 10:00 PM

Have you ever even thought about this?

"The Federal Reserve is formally asking Congress for authority -- starting this year -- to pay interest on commercial-bank reserves, in an effort to gain better control over interest rates and more leverage to battle the credit crunch...

In 2006, Congress gave the Fed permission to pay interest on reserves -- the sums banks keep on deposit at the Fed -- but it delayed the effective date of the legislation until 2011 to postpone the cost to the Treasury.

Banks are required by law to hold a certain fraction of their deposits in reserve accounts at the Fed, but receive no interest on these deposits. Having the authority to pay interest would solve two technical headaches for the Fed.

If they earned interest from the Fed, banks would have no incentive to lend out excess reserves for less. That would make the Fed's benchmark federal-funds rate, which banks charge on overnight loans to each other, less likely to plunge below the Fed's official target -- now 2% -- on days when the banking system was awash in cash.

I'll bet this sort of stuff never even entered your thinking . . .

>


Source:
Fed Seeks Approval to Pay Interest to Banks
GREG IP
WSJ, May 7, 2008
http://online.wsj.com/article/SB121011673771072231.html

Tuesday, May 06, 2008 | 10:00 PM | Permalink | Comments (35) | TrackBack (0)
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Comments

"I'll bet this sort of stuff never even entered your thinking . . ."

Much worse has entered mine.

Posted by: Pat G. | May 6, 2008 10:14:46 PM

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