Fed Moves To Strengthen Exit Tool

The Federal Reserve on Monday moved to make sure that the tool it wants to use to move interest rates higher actually would works as intended. The Fed has said it will use the interest rate paid on excess reserves to tighten policy. But, at the moment, the Fed bases payments of this rate on an average of the interest rate maintained over a two-week period. Without change, if the Fed were to tighten during one of the two-week maintenance periods, the full effect of a rate increase would not show through until some number of days following the move. In order to make sure that the full effect of the increase would be felt immediately, the Fed has proposed a new rule that would allow the U.S. central bank to calculate certain interest payments based on a daily rate.

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