The federal funds rate could become useless as a policy tool thanks to plans to increase banks’ reserves, according to testimony from Federal Reserve Board chairman Ben Bernanke.
Bernanke did not appear before the House Committee on Financial Services as planned, due to heavy snow in the Washington, DC area, but his pre-released written testimony stated “the level of activity and liquidity in the federal funds market has declined considerably, raising the possibility that the federal funds rate could for a time become a less reliable indicator than usual of conditions in short-term money markets”.
Instead, he suggested, the Fed could use a combination of the recommended level of bank reserves and the interest rate paid on excess reserves to indicate its policy target, which would be “an alternative short-term interest rate”.
This new approach could see the Federal Reserve bracket its target rate between the interest rate paid on excess reserves and the Fed discount rate, Bernanke proposed. This ‘corridor’ approach would tend to keep the funds rate within a set range: it would not rise above the discount rate because banks could simply borrow more cheaply from the Fed discount window; and it would not fall below the excess reserves rate because banks could then make a better return by depositing their cash as excess reserves.
More on Regulation
Japanese banks start to ponder how they will cope with new TLAC rules
State watchdogs issue warnings as insurers turn to proprietary index products
Greater flexibility welcomed, but problems may remain for mortgage lenders
FCA investigating delays and handling of mis-selling cases
Loomis Sayles vice-chairman discusses the US credit markets
The US has recovered from recession but still faces an enormous debt burden. The onus is now on companies to pick up the slack in the economy and keep bonds buoyant
The head of European credit portfolio management at Pimco talks to Credit's Alex Monro about the ongoing Eurozone crisis, and the likely investment themes for 2011.
The European securitisation markets were among the hardest hit by the financial crisis: large losses on a range of securitised products led to a drop-off in investor demand, while prohibitive spreads made...
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.