| SAN FRANCISCO
SAN FRANCISCO Dec 3 The Federal Reserve has
more reason than ever to cut a key U.S. lending rate it has
kept at just above zero since the depths of the financial
crisis, a top Fed policymaker suggested on Tuesday.
The Fed set the interest rate it pays banks on their excess
reserves at 0.25 percent when it introduced it in 2008, and it
has sat there ever since.
Investors have lately been abuzz with speculation that the
Fed could cut that rate as a way to signal its seriousness about
keeping interest rates low even after it reduces its $85
billion-a-month bond-buying stimulus program.
"As everybody says, it's not going to be a game changer, but
given that we're doing a lot of unconventional policy and
pushing hard, I think it would make sense," San Francisco
Federal Reserve Bank President John Williams told Reuters in an
interview. "If you can get the funds rate trading a little lower
and bring down interest rates a little lower, that's a
Williams is a strong supporter of the Fed's bond-buying
program. On Tuesday, he said he believes that the Fed needs to
do more to prove it is committed to keeping short-term rates low
as long as needed to support the recovery.
Most importantly, he said, the Fed should give better
guidance on what would induce it to raise rates once the U.S.
unemployment rate falls to 6.5 percent, the level at which the
Fed said has said it would consider an interest-rate hike.
Williams participates in the meetings of the policymaking
Federal Open Market Committee, but he will not become a voting
member of the FOMC until 2015.
The rate the Fed paid on excess reserves is distinct from
the Fed's main policy rate, which it has kept at between zero
and 0.25 percent for nearly five years.
But reducing that rate could force more money into the
broader financial system in the form of loans to stimulate
investment, hiring and economic growth. Banks keep about $2.5
trillion in excess reserves.
"Most participants" at the Fed's latest policy-setting
meeting thought lowering the rate was "worth considering at some
stage," according to minutes of the meeting released last month.
Critics worry whether money markets can still function if
rates fall to zero; indeed, over the years, the Fed has
considered and rejected the idea of reducing the rate in part
because of that very concern.
But a new central bank tool blunts that risk, Williams said
Known as a fixed-rate full-allotment reverse repo facility,
the tool has been touted as a way to mop up excess cash in the
financial system once the Fed needs to start raising rates. [ID:
But it could also be helpful should the Fed decide to lower
the rate it pays to banks, Williams said.
"We do have this ability through this reverse repo that's
been tested by the New York Fed that basically makes sure we can
control short-term interest rates even if we ... lowered the
interest on reserves closer to zero," Williams said.
Still, Williams did not suggest the idea is necessarily on
the Fed's front burner.
"On the margin, I thought the pros slightly outweigh the
cons," he said. "Obviously, that's not what we are doing.
It's been an issue we've discussed several times over the years.
It's always been part of that mix: 'How do you weigh the costs