Everything About Nothing

As part of the $700 billion bailout bill, the Federal Reserve was given the power to pay interest on reserves held at the central bank for the first time. This move was set up to narrow the gap between the key lending rate, the rate at which banks take out loans from the Fed, and the rate that is paid to hold that money in excess reserves in the central banks. With the credit crisis continuing to affect many markets, it was hoped that help to encourage trading in the funds market.

One of the primary ways that the Federal Reserve has of tweaking the economy is to change the interest rate tied to loans it makes to the central banks. However, this wasn’t seen as sufficient during this historic credit crisis. They continue to look into new ways to make the central banks more stable, so they can continue to loan monies, and also to give an incentive to the markets to continue trading.

Whether this will actually work, no one knows. It will take time to see the effects of these moves on the markets. Right now, regional banks are not in a lending move and it doesn’t appear that the actions have had much effect from the consumer standpoint. However, from a banking standpoint, it may be relieving much of the fear of having no funds, should a run on the bank occur, or not making sufficient monies to cover operating expenses.

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