October 17, 2018 / 7:29 PM / a year ago

Fed downplays policy headaches from drop in bank reserves

FILE PHOTO: A jogger runs past the Federal Reserve building in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie/File Photo

NEW YORK (Reuters) - The Federal Reserve downplayed any disruption to its policy tools from a drop last month in the so-called excess reserves that flow among banks, according to minutes published Wednesday of the U.S. central bank’s Sept. 25-26 meeting.

Since the Fed began shrinking its balance sheet a year ago, it has shed some $250 billion in bonds accumulated to help the economy recover from recession. Over the same time, bank reserves dropped by more than twice that value, which has encouraged an upward creep of the Fed’s main policy rate within a defined range, currently set at 2.00-2.25 percent. [nL2N1VD0QU]

The U.S. central bank is currently paying a 2.20 percent interest rate on excess bank reserves (IOER).

In September, this knock-on effect was exacerbated by a jump in tax receipts flowing into the U.S. Treasury Department’s account at the Fed.

The minutes described last month’s dip as sharp but temporary. However “that reduction in reserves in the banking system did not seem to have any effect on the federal funds market,” according to the manager of the Fed’s portfolio, who gave a presentation during the meeting.

The federal funds policy rate has crept up to within 0.03 percent - or 3 basis points - of its ceiling within the range. “That spread stood at 3 basis points over much of the period and seemed likely to narrow to 2 basis points in the near future,” the minutes said.

In late September, the difference between IOER and the daily average fed funds rate narrowed to 2 basis points before widening out to 3 basis points.

Reporting by Jonathan Spicer and Richard Leong; Editing by David Gregorio

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