Fed Raises Interest Rates
on excess reserve balances
The Federal Reserve Board on Wednesday announced that it will alter the formula used to determine the interest rate paid to depository institutions on excess balances.
Previously, the rate on excess balances had been set as the lowest federal funds rate target established by the Federal Open Market Committee (FOMC) in effect during the reserve maintenance period minus 75 basis points. Under the new formula, the rate on excess balances will be set equal to the lowest FOMC target rate in effect during the reserve maintenance period less 35 basis points. This change will become effective for the maintenance periods beginning Thursday, October 23.
The Board judged that a narrower spread between the target funds rate and the rate on excess balances at this time would help foster trading in the funds market at rates closer to the target rate. The Board will continue to evaluate the appropriate setting of the rate on excess balances in light of evolving market conditions and make further adjustments as needed.
October 22nd, 2008 at 11:18 am
They have been missing on the downside a lot lately since changing their policies via paying interest on reserves. As they replace the Fed funds market by becoming the Fed funds market (sort of), they are having a learning experience. Not that we want the Fed to be a big exercise in on-the-job training, or jazz (making it up as we go), but they are traveling in uncharted waters.
October 22nd, 2008 at 12:00 pm
It is very odd, with interest on excess balances nobody should sell funds below FF-75 but it happens…
October 22nd, 2008 at 2:36 pm
the FOMC is clearly concerned about the headline FFT becoming towards 0. This is another shot towards throwing money at the black hole, too bad the cartridge is almost empty.