The Fed set the interest rate it pays banks on their excess reserves
at 0.25 percent when it introduced it in 2008, and it has sat there
Investors have lately been abuzz with speculation that the Fed could
cut that rate as a way to signal its seriousness about keeping
interest rates low even after it reduces its $85 billion-a-month
bond-buying stimulus program.
"As everybody says, it's not going to be a game changer, but given
that we're doing a lot of unconventional policy and pushing hard, I
think it would make sense," San Francisco Federal Reserve Bank
President John Williams told Reuters in an interview. "If you can
get the funds rate trading a little lower and bring down interest
rates a little lower, that's a positive."
Williams is a strong supporter of the Fed's bond-buying program. On
Tuesday, he said he believes that the Fed needs to do more to prove
it is committed to keeping short-term rates low as long as needed to
support the recovery.
Most importantly, he said, the Fed should give better guidance on
what would induce it to raise rates once the U.S. unemployment rate
falls to 6.5 percent, the level at which the Fed said has said it
would consider an interest-rate hike.
Williams participates in the meetings of the policymaking Federal
Open Market Committee, but he will not become a voting member of the
FOMC until 2015.
The rate the Fed paid on excess reserves is distinct from the Fed's
main policy rate, which it has kept at between zero and 0.25 percent
for nearly five years.
But reducing that rate could force more money into the broader
financial system in the form of loans to stimulate investment,
hiring and economic growth. Banks keep about $2.5 trillion in excess
"Most participants" at the Fed's latest policy-setting meeting
thought lowering the rate was "worth considering at some stage,"
according to minutes of the meeting released last month.
Critics worry whether money markets can still function if rates fall
to zero; indeed, over the years, the Fed has considered and rejected
the idea of reducing the rate in part because of that very concern.
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But a new central bank tool blunts that risk, Williams said on
Known as a fixed-rate full-allotment reverse repo facility, the tool
has been touted as a way to mop up excess cash in the financial system once the
Fed needs to start raising rates.
But it could also be helpful should the Fed decide to lower the rate
it pays to banks, Williams said.
"We do have this ability through this reverse repo that's been
tested by the New York Fed that basically makes sure we can control
short-term interest rates even if we ... lowered the interest on
reserves closer to zero," Williams said.
Still, Williams did not suggest the idea is necessarily on the Fed's
"On the margin, I thought the pros slightly outweigh the cons," he
said. "Obviously, that's not what we are doing. It's been an issue
we've discussed several times over the years. It's always been part
of that mix: 'How do you weigh the costs and benefits?'"
[REUTERS MEDIA; By Ann
(Additional reporting by Jonathan Spicer
in New York; editing by Jan Paschal)
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