http://www.bloomberg.com/news/2012-0...-ecb-move.html
Snippet:
Federal Reserve Chairman Ben S. Bernanke may be taking another look at cutting the interest ratethe 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.
Cutting Rate
The institutions’ last meetings ended with the Fed prolonging its Operation Twist program to extend the maturities of assets on its balance sheet, the ECB cutting its benchmark rate to a record low 0.75 percent and the BOE restarting bond buying.
By reducing the interest it pays on excess reserves, a central bank gives financial institutions an incentive to shift their money into lending that yields a higher return. The aim is to expand the supply of credit and speed economic growth.
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.
Traders have speculated the Fed will follow the ECB, pushing short-term rates lower in the U.S., according to Jim Lee, head of U.S. derivative strategy at Royal Bank of Scotland Group Plc’s RBS Securities Inc. in Stamford, Connecticut. The fed funds effective rate fell to 14 basis points on July 27 from 17 basis points on July 5. A basis point is 0.01 percentage point.
Stop Paying
In contrast, some lawmakers have urged Bernanke to stop paying interest on reserves.
“What you’re actually doing by this is sort of incentivizing the banks” to “keep their excess reserves at the Fed,” Representative Scott Garrett, a Republican from New Jersey, said to Bernanke during Feb. 29 congressional testimony by the central bank chief. “Isn’t that sort of counter to what your policy should be?”
Bernanke said the benefits from a rate reduction would be“pretty small.” Also, a cut would risk triggering some“financial side effects.”
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.
“That’s a range of things that we could do,” Bernanke said. “Each one of them has costs and benefits, and that’s an important part of the calculation.”
An IOER reduction alone probably wouldn’t buoy economic growth, said George Goncalves, head of interest-rate strategy in New York at Nomura Holdings Inc., a primary dealer.
The Fed may make the cut “in combination with a change in communication policy” extending the Fed’s commitment to hold the main interest rate close to zero beyond late 2014, or paired with another round of quantitative easing, Goncalves said.
To contact the reporters on this story: Caroline Salas Gage in New York at [email protected]; Liz Capo McCormick in New York at [email protected]
Snippet:
Federal Reserve Chairman Ben S. Bernanke may be taking another look at cutting the interest ratethe 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.
Cutting Rate
The institutions’ last meetings ended with the Fed prolonging its Operation Twist program to extend the maturities of assets on its balance sheet, the ECB cutting its benchmark rate to a record low 0.75 percent and the BOE restarting bond buying.
By reducing the interest it pays on excess reserves, a central bank gives financial institutions an incentive to shift their money into lending that yields a higher return. The aim is to expand the supply of credit and speed economic growth.
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.
Traders have speculated the Fed will follow the ECB, pushing short-term rates lower in the U.S., according to Jim Lee, head of U.S. derivative strategy at Royal Bank of Scotland Group Plc’s RBS Securities Inc. in Stamford, Connecticut. The fed funds effective rate fell to 14 basis points on July 27 from 17 basis points on July 5. A basis point is 0.01 percentage point.
Stop Paying
In contrast, some lawmakers have urged Bernanke to stop paying interest on reserves.
“What you’re actually doing by this is sort of incentivizing the banks” to “keep their excess reserves at the Fed,” Representative Scott Garrett, a Republican from New Jersey, said to Bernanke during Feb. 29 congressional testimony by the central bank chief. “Isn’t that sort of counter to what your policy should be?”
Bernanke said the benefits from a rate reduction would be“pretty small.” Also, a cut would risk triggering some“financial side effects.”
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.
“That’s a range of things that we could do,” Bernanke said. “Each one of them has costs and benefits, and that’s an important part of the calculation.”
An IOER reduction alone probably wouldn’t buoy economic growth, said George Goncalves, head of interest-rate strategy in New York at Nomura Holdings Inc., a primary dealer.
The Fed may make the cut “in combination with a change in communication policy” extending the Fed’s commitment to hold the main interest rate close to zero beyond late 2014, or paired with another round of quantitative easing, Goncalves said.
To contact the reporters on this story: Caroline Salas Gage in New York at [email protected]; Liz Capo McCormick in New York at [email protected]