Fed to discuss interest on reserves
It is one of the options to address financial markets’ liquidity problems
(WASHINGTON) The US Federal Reserve’s Board of Governors will hold a closed meeting today to discuss paying interest on bank reserves, one of a number of options officials have been mulling to address liquidity problems in financial markets in case measures taken to date fail to gain traction.
The Fed announced the meeting on its website on Monday.
The meeting does not necessarily mean that the US central bank is poised to take that step, which would require congressional action. But Fed officials have identified that measure as among a menu of options that the central bank is considering as it copes with persistent problems in credit markets that are weighing on US economic growth.
Congress in 2006 granted the Fed authority beginning in 2011 to pay interest on bank reserves. At the time, the central bank assigned staff to study the implications that such a move could have on its operations.
The staff report is now ready and will be presented to the Fed during the regularly scheduled meeting of its interest rate setting panel, a Fed official added, declining to comment further on whether the presentation is pegged to any imminent steps to boost liquidity.
The information is timely because it comes as Fed officials seek to thaw frozen credit markets with a series of liquidity offerings to banks and financial institutions. Despite offering more than US$400 billion in funding through cash and Treasury securities, banks and financial institutions continue to be wary about lending to one another.
Fed officials have been concerned recently that credit markets remain clogged in spite of extensive liquidity measures.
Paying interest on reserves would allow the Fed to separate interest rate policy from liquidity and financial stability policy, JPMorgan economist Michael Feroli said.
‘In particular, when the central bank pays interest on reserves, it effectively sets a floor under overnight interest rates,’ he said.
‘In so doing, it frees up open market operations to aggressively provide market liquidity without concern that such actions would push down overnight rates.’ - Reuters
Source : Business Times - 30 Apr 2008
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