Frank: OK seen for Fed to pay interest on reserves
The US Congress is likely to give the Federal Reserve authority to begin paying interest on bank reserves this year, Rep. Barney Frank, chairman of the House Financial Services Committee, said today.
"I got a letter from them the other day and I am favorably inclined," the Massachusetts Democrat said after addressing a Boston business group, referring to a formal request from the US central bank for the authority.
Asked if it was likely approval would be granted this year, Frank responded, "yes."
The authority to pay interest on the reserves banks must hold at the central bank would give the Fed a tool to provide liquidity to financial markets without putting downward pressure on interest rates.
In 2006, Congress authorized the Fed to begin paying interest on reserves, but not until 2011.
If the Fed were able to pay interest on reserves, banks would have no incentive to lend out funds at rates lower than those the central bank was paying. This would enable the Fed to put a floor under interest rates even as it pumped funds into credit markets. (Reuters)
