![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
Fed may abandon funds rate – Bernanke
The federal funds rate could become useless as a policy tool thanks to plans to increase banks’ reserves, according to testimony from Federal Reserve Board chairman Ben Bernanke.
Bernanke did not appear before the House Committee on Financial Services as planned, due to heavy snow in the Washington, DC area, but his pre-released written testimony stated “the level of activity and liquidity in the federal funds market has declined considerably, raising the possibility that the federal funds rate could for a time become a less reliable indicator than usual of conditions in short-term money markets”.
Instead, he suggested, the Fed could use a combination of the recommended level of bank reserves and the interest rate paid on excess reserves to indicate its policy target, which would be “an alternative short-term interest rate”.
This new approach could see the Federal Reserve bracket its target rate between the interest rate paid on excess reserves and the Fed discount rate, Bernanke proposed. This ‘corridor’ approach would tend to keep the funds rate within a set range: it would not rise above the discount rate because banks could simply borrow more cheaply from the Fed discount window; and it would not fall below the excess reserves rate because banks could then make a better return by depositing their cash as excess reserves.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Regulation
Looming US Basel endgame redraft sparks calls to save IRB
Experts say 20 years of data makes credit risk models more appropriate than standardised approach
Cool heads must guide financial regulation of climate risk
Supervisors can’t simply rely on ‘magical thinking’ of market discipline, says Sergio Scandizzo
Markets worry EU’s reporting simplification will add to burden
Rather than reducing firms’ obligations, market participants fear it could end up increasing requirements
EU banks show basic instinct for credit valuation adjustments
Simpler approach to CVA appeals even to some already using more complex models for counterparty risk
Bank of England wants dynamic Emir for UK clearing houses
Review won’t just photocopy EU legislation, as BoE seeks to make rules simpler and adaptable
Big banks could be sidelined from future rescue deals – FSB
Exacerbation of too-big-to-fail means G-Sibs could already be too large to take extra assets
More guidance, less enforcement: the SEC under Paul Atkins
Current and former insiders expect clearer crypto rules and an end to regulatory violation sweeps
During Trump turbulence, value-at-risk may go pop
Trading risk models have been trained in quiet markets, and volatility is now looming