The interest rate on excess reserves plays a supporting role to the fed funds rate in monetary policy. Previously, the Fed set the interest rate on excess reserves at the same level as the top of the- fed funds rate. But on Wednesday the Fed said the interest rate on excess reserves would now be set 0.05 percentage point below the top of the range. As a result, the interest rate on excess reserves is now 1.95 percent... recent developments in the fed funds market prompted the Fed to make its change.


The government has recently been issuing a lot more debt to finance its deficit, much of it in the form of Treasury bills that are sold to investors. But to find sufficient buyers, the Treasury has had to pay higher rates on Treasury bills. This helped attract money out of the federal funds market into Treasury bills, and in turn that caused the fed funds rate to move higher and closer to the top of its range.

This caught the Fed's eye. The central bank, according to analysts, wants to avoid a situation in which the fed funds rate moves above the Fed's target range. "The Fed doesn't want anyone in the market to think it's not in control of overnight rates," Lou Crandall, chief economist at Wrightson ICAP, said. "It might worry some people if it went above the upper band''

Seems like the Fed doesn't have a clue how this post-2008 jalopy of a monetary system works...

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