Interest Rate for Reserves Changed...Again
Yesterday, the Federal Reserve announced that it will change the formulas used to pay interest on required and excess reserves. Again.
Previously, the rate on required reserve balances had been set at the average target federal funds rate established by the Federal Open Market Committee (FOMC) over a reserves maintenance period minus 10 basis points. The rate on excess balances had been set as the lowest federal funds rate target in effect during a reserve maintenance period minus 35 basis points. Under the new formulas, the rate on required reserve balances will be set equal to the average target federal funds rate over the reserve maintenance period. The rate on excess balances will be set equal to the lowest FOMC target rate in effect during the reserve maintenance period. These changes will become effective for the maintenance periods beginning Thursday, November 6.
Read the official press release here. Here's my take on this. This is the second change to the formula since the Fed announced that it would begin paying interest on reserves. I'm sure many of you estimated how the Fed's decision would affect your balance sheet and whether it made sense to alter how you reserve funds. But if you haven't estimated the effect of the amendments, you no longer have an accurate picture. In addition, since this is the second amendment this year, this is something you'll want to keep an eye on. Or at least let your CFO know.