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NEW YORK, May 6 (Reuters) - The interest that U.S. banks charge each other to borrow reserves slipped to its lowest in about six weeks on Friday following the Federal Reserve’s adjustment last week on what it pays banks on reserves, New York Federal Reserve data released on Monday showed.
The average, or effective, federal funds rate dipped to 2.40% on Friday, the lowest level since March 26. The rate which the U.S. central bank targets to conduct monetary policy, was 2.41% the day before.
The fed funds rate’s premium above the Fed’s interest on excess reserves (IOER) decreased to 5 basis points from a record high 6 basis points on Thursday.
A number of factors had resulted in the recent rise in the fed funds rate, including reduced bank reserves linked to the Fed’s balance sheet normalization, increased government borrowing, and less willingness by big banks to lend reserves due to tougher capital standards in response to the global credit crisis.
Last Wednesday, the Fed narrowed the gap between the IOER and the bottom end of its target rate on interest rates for a third time since last June in a bid to prevent the fed funds rate from reaching the top of the range.
It trimmed IOER by 5 basis points to 2.35%, while holding its target range at 2.25-2.50%.
Reporting by Richard Leong Editing by Chizu Nomiyama and Jonathan Oatis