The Federal Reserve wants the banking system flush with cash to keep the economy...
NEW YORK - The Federal Reserve wants the banking system flush with cash to keep the economy humming, but there may be bottlenecks that undermine the U.S. central bank’s credibility to influence interest rates.
Big banks required to meet strict liquidity requirements have been holding more reserves than regional banks that do not, Fed researchSince the aftermath of the 2008 financial crisis, when it flooded the banking system with funds, the Fed has controlled rates primarily by paying banks interest on those funds. In theory, rates should not trade much below what banks and other traders can earn risk-free.
After its May meeting, the Fed tweaked the interest on excess reserves for a third time since June 2018 without changing the fed funds target in a bid to hold down borrowing rates. The Fed now pays banks 2.35% interest on excess reserves. In recent weeks, the fed funds rate has edged down to 2.38% from a high of 2.45%. At all points it has stayed within the Fed’s target range, which is currently 2.25-2.50%.
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