Another Tool for the Fed ?

Have you ever even thought about this?

"The Federal Reserve is formally asking Congress for
authority — starting this year — to pay interest on commercial-bank
reserves, in an effort to gain better control over interest rates and
more leverage to battle the credit crunch…

In 2006, Congress gave the Fed permission to pay
interest on reserves — the sums banks keep on deposit at the Fed –
but it delayed the effective date of the legislation until 2011 to
postpone the cost to the Treasury.

Banks are required by law to hold a certain fraction
of their deposits in reserve accounts at the Fed, but receive no
interest on these deposits
. Having the authority to pay interest would
solve two technical headaches for the Fed.

If they
earned interest from the Fed, banks would have no incentive to lend out
excess reserves for less. That would make the Fed’s benchmark
federal-funds rate, which banks charge on overnight loans to each
other, less likely to plunge below the Fed’s official target — now 2%
– on days when the banking system was awash in cash.

I’ll bet this sort of stuff never even entered your thinking . . .


Fed Seeks Approval to Pay Interest to Banks
WSJ, May 7, 2008

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