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Monday, October 06, 2008
Fed to Pay Interest on Reserves, Expand Lending
Adam Samson
FOXBusiness
![fed seal money blue [276]](/images/stories/Fedseal_money_blue.jpg)
The Federal Reserve said on Monday that it will begin paying interest on bank reserves and expand its loan program in a bid to stabilize the turbulent financial markets.
The Fed will pay 10 hundredths of one percent below the Federal Funds Rate on required reserves, and 75 hundredths of one percent below the Federal Funds Rate on excess balances, the central bank said in a release.
Large banks are required to hold 10% of deposits they hold at the Federal Reserve each night to ensure they do not over-lend clients' deposits. Previously, banks were unable to earn any interest on money held overnight at the Fed, which meant they couldn't profit from lending 10% of their deposits. In paying banks interest for money held overnight, the Fed hopes to mitigate the cost to banks of holding so-called required reserves and ultimately promote "efficiency in the banking sector," the release said.
By paying interest on excess balances, or those balances that are held at the Fed overnight and exceed the required level, the central bank hopes to create a lower limit on the Federal Funds Rate. Essentially, this means it the Fed can pour liquidity into the market without forcing the Federal Funds Rate, or the interest rate banks charge each other to borrow money overnight, to plummet. Recently, the Fed's actions to increase liquidity have caused the effective Federal Funds Rate to gyrate wildly about the target level.
The Fed also said it will step up lending through its Term Auction Facility by $150 billion, which will eventually bring the amounts outstanding under the program to about $600 billion. The Term Auction Facility was set up by the Fed after the fall of investment bank Bear Stearns to provide loans to investment banks that couldn't previously borrow from the central bank.
The move comes days after Congress approved a $700 billion financial rescue effort that enables the Federal Government to acquire troubled assets from banks. Regulators hope these moves will help to unfreeze credit markets that have recently seized up and shore up the embattled global financial system.
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Each Thursday at 8:30 a.m. EST, the government tells us about how many people went through one of the most unpleasant experiences of their lives: filing for unemployment help for the first time. It's essentially a survey, since state unemployment is managed by your state, not the federal government.
The report runs like clockwork, but it¿s notoriously inaccurate. For one thing, the number often has wide swings from week to week, so it's a rare event for the figures to come in exactly as economists predict. Second, it is very seasonal. Folks like school bus drivers often file claims when summer comes around, and other people get retail jobs as the holidays approach. Some economists like to use it to handicap the big monthly employment situation report, but they often do so at their statistical peril
Sometimes, weekly jobless claims make political, rather than economic, noise. If there¿s a big spike in claims, some politicians will often cite the number as a sign the economic sky is falling. But, it's important to remember what the weekly jobless numbers don't tell you: you don't know how long these folks stay unemployed, how long they've been out of work in the first place, or even if they're truly out of work and not just trying to scam the government.
Because it's so unreliable, economists usually put the past four weeks together and look at a moving average. That gives a little better picture of the overall trend, but it's still not a great indicator.
