Federal Government

New Tool?

Posted on Tuesday, February 23, 2010

A little-known Fed mechanism — referred to as the interest rate on excess reserves — essentially gives the Fed leverage over $1.1 trillion in bank deposits. Most of those deposits were created as the Fed gobbled up mortgage-backed securities and Treasury notes and bonds during the financial crisis. The banks in turn parked the funds at the Fed as reserves. In the months and years ahead, the Fed wants to make sure that banks do not reduce their reserves too quickly, because it could create inflationary pressures as banks step up their lending. To achieve its goal, the central bank will raise the interest rate on excess reserves, now 0.25 percent. It also plans to lift its target for the fed funds rate — what banks charge one another for overnight loans and the centerpiece of its policy statements since 1994. The ability to charge an interest rate on excess reserves was created in 2006, after decades of discussion, when Congress granted the Fed such authority. cnnmoney.com

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