Why is the payment of interest on reserve balances, and on excess balances in particular, especially important under current conditions?
Recently the Desk has encountered difficulty achieving the operating target for the federal funds rate set by the FOMC, because the expansion of the Federal Reserve’s various liquidity facilities has caused a large increase in excess balances. The expansion of excess reserves in turn has placed extraordinary downward pressure on the overnight federal funds rate. Paying interest on excess reserves will better enable the Desk to achieve the target for the federal funds rate, even if further use of Federal Reserve liquidity facilities, such as the recently announced increases in the amounts being offered through the Term Auction Facility, results in higher levels of excess balances. 4. What other methods does the Federal Reserve have at its disposal to facilitate the implementation of monetary policy when the use of its various liquidity facilities contributes to high levels of excess balances? Initially, the Federal Reserve was able to prevent excess balances from expanding as the use of
Related Questions
- When will interest rates on required reserve balances and on excess balances for a reserve maintenance period be updated on the Board of Governors website?
- Why is the payment of interest on reserve balances, and on excess balances in particular, especially important under current conditions?
- How are required reserve balances and excess balances for interest payment calculations determined?
