Fed Wants to Pay Interest On Bank Reserves

-- Federal Reserve Chairman Ben S.Bernanke, seeking ways to stabilize money markets, will askCongress for authority to pay interest on commercial-bankreserves this year, a person familiar with the discussions said. The central bank isn't authorized by Congress to beginmaking such payments until 2011. Allowing interest on bankreserves may allow the Fed to pump more funds into the bankingsystem without pushing its main policy rate lower, in effectseparating action to boost liquidity from monetary policy. ``It would have the effect of putting a floor under thefederal funds rate,'' said Walker Todd, a research fellow at theAmerican Institute for Economic Research in Great Barrington,Massachusetts. If the Fed paid an interest rate equal to the federal fundsrate, commercial banks would avoid dumping any excess cash intomoney market, which in the past has driven rates below the Fed'starget. The desk has struggled to keep the federal funds rate stableas banks attempted to manage their reserve needs most effectivelyat a time when credit markets were seizing up. The federal funds rate on May 2 traded in a range of 0.1percent to 2.5 percent even though the target was 2 percent. OnApril 23, the rate traded as low as 1 percent and as high as 10percent, even though the target rate was 2.25 percent.