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Fed board to discuss paying interest on reserves
April 28, 2008 / 11:53 PM / 10 years ago

Fed board to discuss paying interest on reserves

WASHINGTON (Reuters) - The Federal Reserve’s Board of Governors will hold a closed meeting on Wednesday to discuss paying interest on bank reserves, one of a number of options officials have been mulling to address liquidity problems in financial markets in case measures taken to date fail to gain traction.

Treasury Secretary Henry Paulson (2nd R) sits alongside Federal Reserve Chairman Ben Bernanke (C) during a meeting of G7 finance ministers and central bank governors at the Treasury Department in Washington October 19, 2007. REUTERS/Jason Reed

The Fed announced meeting on its website on Monday.

The meeting does not necessarily mean the U.S. central bank is poised to take that step, which would require congressional action. But Fed officials have identified that measure as among a menu of options the central bank is considering as it copes with persistent problems in credit markets that are weighing on U.S. economic growth.

Congress in 2006 granted the Fed authority beginning in 2011 to pay interest on bank reserves. At the time, the central bank assigned staff to study the implications such a move could have on its operations.

The staff report is now ready and will be presented to the Fed during the regularly scheduled meeting of its interest-rate setting panel, a Fed official added, declining to comment further on whether the presentation is pegged to any imminent steps to boost liquidity.

The information is timely because it comes as Fed officials seek to thaw frozen credit markets with a series of liquidity offerings to banks and financial institutions. Despite offering more than $400 billion in funding through cash and Treasury securities, banks and financial institutions continue to be wary about lending to one another.

Fed officials have been concerned recently that credit markets remain clogged in spite of extensive liquidity measures.

Paying interest on reserves would allow the Fed to separate interest rate policy from liquidity and financial stability policy, JPMorgan economist Michael Feroli said.

“In particular, when the central bank pays interest on reserves it effectively sets a floor under overnight interest rates,” he said.

“In so doing it frees up open market operations to aggressively provide market liquidity without concern that such actions would push down overnight rates.”

Editing by Andre Grenon

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