How much do your accounts cost?
by. Henry Meier
The minutes from the most recent FED Open Market Committee meeting are getting a lot of attention (http://www.zerohedge.com/news/2013-11-24/banks-warn-fed-they-may-have-start-charging-depositors), not because of the increasingly redundant debate about if and when the FED will “taper” its bond buying program, but because of the FED’s discussion of what it will do to keep downward pressure on interest rates even after its bond buying binge ends. Specifically, this passage is getting some major banks riled up:
Participants also discussed a range of possible actions that could be considered if the Committee wished to signal its intention to keep short-term rates low or reinforce the forward guidance on the federal funds rate. For example, most participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions. By contrast, participants expressed a range of concerns about using open market operations aimed at affecting the expected path of short-term interest rates, such as a standing purchase facility for shorter-term Treasury securities. . . (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20131030.pdf)
By way of background, the interest on excess reserves is the interest that FED banks pay to financial institutions for holding their excess reserves. Keep in mind that the FED has always sought to underscore its intention to keep interest rates low long after the bond buying ends. This may seem like an obvious point, but when conventional wisdom was that tapering was imminent over the summer, there was also speculation that the FED would soon raise interest rates. As a result, the FED’s comments are best understood as part of a wider discussion about how to make sure its interest rate intentions are abundantly clear.
Still, the suggestion that the FED might cut back on the interest it pays for these funds has gotten “leading banks” to publicly state that they would start charging depositors for the right to deposit their money if the FED cuts its own interest payments.
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