Fed May Cut Interest on Reserves

Central bank could lower rate it pays on bank reserves from current 0.25%.

Federal Reserve Chairman Ben S. Bernanke may be taking another look at cutting the interest rate the Fed pays on bank reserves to bring down short-term borrowing costs and spur the slowing U.S. expansion.

Bernanke testified to Congress on July 17 that reducing the rate from its current 0.25 percent is one of several easing steps the Fed might take to reduce unemployment stuck above 8 percent for more than three years. In February, by contrast, the Fed chairman told Congress that lowering the rate might drive away investors from short-term money markets.

Excess Reserves

Excess reserves have mushroomed as the Fed bought securities from banks in its bid to lower long-term interest rates. The amount of such reserves at the Fed was $1.49 trillion on July 25, up from $991 billion at the end of 2010 and $2.4 billion at the end of 2007, Fed data show.

Market Stability

Market stability following the ECB’s move has probably prompted Bernanke to reconsider, Feroli said. Rising short-term borrowing costs may have also made the tool more appealing.

Other Tools

The Fed’s other stimulus tools include altering the language on the outlook for interest rates and using the so-called discount window for direct lending to banks, Bernanke said in July 17 congressional testimony.

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