Federal Reserve Proposes A Term Deposit Facility for Draining Reserves

The Federal Reserve has proposed the establishment of a term deposit facility for draining reserves from the U.S. financial system:

“Under the proposal, the Federal Reserve Banks would offer interest-bearing term deposits to eligible institutions through an auction mechanism. Term deposits would be one of several tools that the Federal Reserve could employ to drain reserves to support the effective implementation of monetary policy.”

While this tool should help the Federal Reserve manage inflation and inflation expectations, the Fed is very careful to note that this proposal does NOT represent an imminent tightening of monetary policy:

“This proposal is one component of a process of prudent planning on the part of the Federal Reserve and has no implications for monetary policy decisions in the near term.”

Finally, here is a summary of the specific proposal that will appear in “The Federal Register”:

“The Board is requesting public comment on proposed amendments to Regulation D, Reserve Requirements of Depository Institutions, to authorize the establishment of term deposits. Term deposits are intended to facilitate the conduct of monetary policy by providing a tool for managing the aggregate quantity of reserve balances. Institutions eligible to receive earnings on their balances in accounts at Federal Reserve Banks (“eligible institutions”) could hold term deposits and receive earnings at a rate that would not exceed the general level of short-term interest rates. Term deposits would be separate and distinct from those maintained in an institution’s master account at a Reserve Bank (“master account”) as well as from those maintained in an excess balance account. Term deposits would not satisfy required reserve balances or contractual clearing balances and would not be available to clear payments or to cover daylight or overnight overdrafts. The proposal also would make minor amendments to the posting rules for intraday debits and credits to master accounts as set forth in the Board’s Policy on Payment System Risk to address transactions associated with term deposits.”


One Comment on “Federal Reserve Proposes A Term Deposit Facility for Draining Reserves”

  1. […] inaction, and the inaction becomes crippling when inflationary pressures finally surface. Even as the Federal Reserve takes initial steps preparing for the day it must drain liquidity from the econo…, this “disagreement dynamic” deserves watching over the coming […]

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