How will authority to pay interest on reserves be helpful in implementing monetary policy?
The Open Market Trading Desk (Desk) at the Federal Reserve Bank of New York is authorized to arrange open market operations in accordance with the operating directive of the Federal Open Market Committee (FOMC), which sets a target for the federal funds rate. Without authority to pay interest on reserves, from time to time the Desk has been unable to prevent the federal funds rate from falling to very low levels. With the payment of interest on excess balances, market participants will have little incentive for arranging federal funds transactions at rates below the rate paid on excess. By helping set a floor on market rates in this way, payment of interest on excess balances will enhance the Desk’s ability to keep the federal funds rate around the target for the federal funds rate.
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