Fed may abandon funds rate – Bernanke
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.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Regulation
Who is Selig? CFTC pick is smart and social, but some say too green
Colleagues praise crypto smarts and collegial style, but views on prediction markets and funding trouble Senate
EU single portal faces battle to unify cyber incident reporting
Digital omnibus package accused of lacking ambition to truly streamline notification requirements
Basel Committee members ‘buying time’ before fixing FRTB mess
Despite inconsistencies today, regulators maintain they want to align global regime eventually
How Basel III endgame will reshape banks’ business mix
B3E will affect portfolio focus and client strategy, says capital risk strategist
Derivatives industry blasts EU reporting framework
Complaints about duplicate and ambiguous trade reporting requirements aired at Esma’s Data Day
Why source code access is critical to Dora compliance
As Dora takes hold in EU, access to source code is increasingly essential, says Adaptive’s Kevin Covington
CVA capital charges – the gorilla in the mist
The behaviour of CVA risk weights at US banks in 2020 hints at the impact of the Basel III endgame
EU’s FRTB multiplier risks picking winners and losers
Attempts to find capital-neutral way to implement new rules might create unlevel playing field