The Federal Reserve announced Wednesday its plans to alter interest rates paid to depository institutions on excess balances. The new rate on excess balances will be 35 basis points below the lowest Federal Open Market Committee target rate; the excess balance rate spread has previously been fixed at 75 basis points. The change took effect Thursday, and means banks will receive higher interest rates on excess balances held at the Federal Reserve. The Fed said in a press statement Wednesday that a narrower spread between the target funds rate and the rate on excess balances should foster more lending between banks. It’s the latest plan by an increasingly involved U.S. government to jump-start much of a frozen credit market. “The Board will continue to evaluate the appropriate setting of the rate on excess balances in light of evolving market conditions and make further adjustments as needed,” the Fed said in the press statement. The Fed’s moves in the broader financial markets appear likely continue, as well, with most analysts now seeing aggressive cuts to the federal funds target rate in months ahead, according to a Bloomberg report Thursday. Economists at HSBC Holdings Inc. (HBC) told Bloomberg that the Fed would probably avoid cutting to zero, however, although easing concern about inflation will likely lead to future cuts in the target rate before year’s end. If the severe rate cuts already in place don’t improve the economy, though, the target rate “could be at zero” by the middle of next year, HSBC economist Ian Morris told Bloomberg. The Fed’s move to adjust how interest is paid on excess balances came just days after Fed chairman Ben Bernanke said Monday that he supported a second round of spending measures to help stimulate the economy, according to a report by the New York Times. “With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture is appropriate,” Bernanke told the House Budget Committee. “The extraordinary tightening in credit conditions has played a central role in the slowdown thus far,” Bernanke said. “If Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers.” The Fed already cut both the federal funds rate and the discount rate in a globally-coordinated move earlier this month. Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade. Editor’s note: To contact the reporter on this story, email firstname.lastname@example.org.
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