August 27, 2012 / 6:21 PM / 5 years ago

MONEY MARKETS-Fed seen refraining from reserve rate cut

4 Min Read

* Cutting IOER unlikely to lift lending - NY Fed blog
    * U.S. overnight repo rate unchanged
    * U.S. sells 3-month bills at same rate as last week
    * No dollar Libor fixings due to U.K. bank holiday

    By Richard Leong
    NEW YORK, Aug 27 (Reuters) - The U.S. Federal Reserve will
likely refrain from lowering the interest it pays on excess bank
reserves as a tool to help the economy, while traders anticipate
signs later this week for more monetary stimulus.
    Traders are focused on whether Fed Chairman Ben Bernanke
will signal the central bank will soon buy more bonds to further
reduce private borrowing costs in his speech at an event in
Jackson Hole, Wyoming on Friday. 
    There has been also chatter about lowering the interest the
Fed pays on excess bank reserves (IOER) with the goal of
reducing unemployment, which has been stuck above 8 percent.
    This view of cutting the IOER gained traction this summer
after the European Central Bank dropped the rate it pays on
excess bank deposits to zero. 
    The Fed currently pays a quarter percentage point on IOER.
    But most analysts have downplayed the chances the Fed will
cut IOER because with short-term U.S. rates already hovering
near zero, such a move might cause more harm than good due to
possible disruption to money markets.
    "The argument is not any better, but it's just more common,"
Alex Roever, short-term interest rate strategist at J.P. Morgan
Securities in New York said of the speculation over IOER.
    On Monday, two Fed staffers weighed in on this issue. They
said in a blog on the New York Federal Reserve website that
cutting the IOER would do little to change the amount of
reserves banks leave with the central bank. 
    "The quantity of balances banks hold on deposit at the Fed
would be essentially unaffected by a change in the IOER rate,"
wrote Gaetano Antinolfi, a Fed senior economist and Todd Keister
of the New York Fed's research and statistics group.
    To be sure, lowering the IOER could exert downward pressure
on interest rates in money markets, causing some banks to lend
more to consumers and businesses, they said.
    But if lower IOER causes interest rates on U.S. Treasury
bills, repurchase agreements and other money products to fall,
investors would feel the squeeze.
    "It could bring repo rates to zero. I would hate for it to
happen," said Jill King, senior portfolio manager at Horizon
Cash Management in Chicago.The New York Fed blog provided fodder for traders in quiet 
trading, due partly to a U.K. bank holiday.
    Key money market rates on dollars were little changed from
Friday's close.
    The overnight rate on repos, a key source of funding for
Wall Street where it uses Treasuries and other investments as
collateral in exchange for cash, was last quoted at 0.21
percent, unchanged from late Friday.
    The U.S. Treasury Department sold $32 billion of new
three-month bills at an interest rate of 0.105
percent, matching the level set at last week's auction.
    Because of the bank holiday in Britain there were no London
interbank offered rate fixings on the pound or the dollar.

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