WASHINGTON — The Federal Reserve Board on Wednesday said it would pay higher interest on excess balances held by depository institutions at the central bank.
The Fed said it would pay interest of 35 basis points below the lowest Federal Open Market Committee federal funds target rate during the period in which excess reserves are held. Previously, the Fed had planned to pay 75 basis points below the lowest FOMC target for the period.
The narrower spread, set to go into effect Oct. 23, "would help foster trading in the funds market at rates closer to the target rate," the Fed said.
The Fed on Oct. 8, in a coordinated action with a handful central banks around the world, cut its target federal funds rate 50 basis points to 1.5%
The Fed said it will continue to evaluate its interest rate policy on excess balances and pledged to "make further adjustments as needed."
The Fed began paying interest on excess reserve balances Oct. 9 after passage of the Emergency Economic Stabilization Act allowed it to begin making the payments prior to the 2011, when it was scheduled to get the authority.