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Policy: Budgets & Deficits

The Fed is considering cutting rates on reserves in ending quantitative easing

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PennAve,Joseph Lawler,Economy,Federal Reserve,Ben Bernanke,Budgets and Deficits,Janet Yellen,Quantitative Easing

Minutes from the Oct. 29-30 meeting of Federal Reserve officials indicate that they are considering a variety of ways to reduce the central bank's bond-buying program without withdrawing stimulus, including by cutting the rate the Fed offers on reserves.

The Fed pays banks a 0.25 percent interest rate for deposits at the Fed, a practice started in 2008. Currently, banks have $2.3 trillion in such deposits.

Lowering that rate could spur banks to look for alternative ways to seek return on those funds, thereby easing credit conditions.

Fed officials at the most recent meeting of the monetary policy committee said that such a step "could be worth considering at some stage," according to minutes of the meeting released wednesday afternoon. They also thought, however, that "the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions."

The minutes make clear that chairman Ben Bernanke and other Fed officials are searching for ways to reduce its $85 billion monthly bond purchases -- a step that might be necessary even without "unambiguous further improvement" in the economy, according to some participants -- while still reassuring markets that interest rates will remain at zero until the economy improves.

Lowering the interest rate paid on reserves might be part of the process as the Fed tries to taper its quantitative easing program in the months ahead.

Officials at the meeting also discussed that the Fed could strengthen its forward guidance about interest rates by adding to its current promise to keep rates near zero until unemployment falls below 6.5 percent, by signaling that they could remain near zero even beyond that point. Bernanke made remarks to that effect in an address Tuesday evening in D.C.

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Author:

Joseph Lawler

Economics Writer
The Washington Examiner