The Federal Reserve is considering replacing or supplementing the federal funds rate with a new interest rate on banks’ excess reserves, Bloomberg reports. The central bank has been unable to control the federal funds rate since the September 2008 bankruptcy of Lehman Brothers Holdings, when it began flooding the financial markets.
In the past, the Fed had controlled the rate by buying or selling Treasury securities and adding or withdrawing cash from the system. The deposit rate would help set a limit under the Fed funds rate, because the Fed would lock up funds by offering a fixed rate of interest for a defined period and prohibiting early withdrawals.
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