Federal Reserve

Fed cuts rate on bank reserves amid repo market turmoil

Key Points
  • Federal Reserve officials responded to this week's tumult in the short-term borrowing markets by sharply cutting the rate it pays on bank reserves.
  • The interest on excess reserves now stands at 1.8%, a 30 basis point cut compared with the 25 basis point reduction for the benchmark funds rate.
VIDEO2:4202:42
Fed lowers rates by quarter point

Federal Reserve officials responded to this week's tumult in the short-term borrowing markets by sharply cutting the rate it pays on bank reserves.

The interest on excess reserves now stands at 1.8%, a 30 basis point cut compared with the 25 basis point reduction for the benchmark funds rate.

The IOER, as it is known, is a guardrail for the funds rate, which this week jumped beyond the previous 2% to 2.25% target range. That move came amid a funding crunch in the repo market, where banks go to exchange high-quality assets like Treasurys for the cash they need to conduct operations.

The Fed conducted two repo operations itself this week, the first which resulted in about $53 billion injected into markets, while the second involved $80 billion.

Setting the IOER is a routine part of Fed business, and the central bank has had to make two earlier technical adjustments to the rate when it rose to the high end of the target range.

In this most recent move, the policymaking Federal Open Market Committee explicitly stated it was adjusting the range to "foster trading in the federal funds market at rates well within the FOMC's target range." That language was added from previous implementation notes that the committee tags on the end of its main statement.

The committee, however, did not announce more aggressive measures to address the difficulties. Some market participants had expected the Fed might tip its hand to more aggressive rate cuts or expansion of its balance sheet, where it keeps the assets it purchases, such as Treasurys and mortgage-backed securities.

This week's funding crunch came amid a reserve level that has dipped to its lowest level in eight years. The events pointed to the possibility that the Fed's estimates of how much in reserves the banks need to operate comfortably is wrong.

VIDEO3:1803:18
Five ways the Fed rate cut will impact your money