The Federal Reserve has kept the interest rate paid on reserve balances at 3.90 per cent, effective Thursday 29 October, alongside its decision to leave the target range for the federal funds rate unchanged at 3.75 to 4 per cent.
The move preserves the settings adopted after the previous policy change rather than introducing a new increase or reduction. The Board of Governors voted unanimously on the reserve-balance rate. The wider rate decision was approved by the Federal Open Market Committee on a 10–2 vote, with Lisa D. Cook and Beth M. Hammack preferring a quarter-point increase in the target range.
Two rates with different roles
The interest on reserve balances is the rate paid on funds that eligible institutions maintain in their accounts within the Federal Reserve system. It is an operational policy tool and is not the same thing as the federal funds target range, although the two settings are designed to work together.
The target range is the Committee’s stated objective for the federal funds rate. The reserve-balance rate is one of the tools used in the system that supports the implementation of that stance. Keeping the reserve-balance rate at 3.90 per cent therefore means that this part of the operating framework will continue at its present level from 29 October.
The decision also keeps the target range at 3.75 to 4 per cent. It does not set a direct rate for household mortgages, credit cards, savings accounts or business loans. Those prices are determined by lenders and markets, though broader borrowing conditions can be influenced by monetary policy over time.
How the implementation framework will continue
Alongside the rate settings, the policy direction keeps several overnight facilities at their existing levels. Standing overnight repurchase agreement operations are to continue at 4 per cent. Standing overnight reverse repurchase agreement operations are to continue at 3.75 per cent, with a per-counterparty limit of 160 billion dollars a day.
The Federal Reserve Bank of New York’s trading desk is also directed to conduct open-market operations as needed to keep the federal funds rate within the 3.75 to 4 per cent target range. The instruction provides for purchases of Treasury bills, and if required, other Treasury securities with remaining maturities of three years or less, to maintain what policymakers describe as an ample level of reserves.
Principal payments from Treasury securities are to be rolled over at auction. Principal payments from agency securities are to be reinvested in Treasury bills. These directions describe how the policy stance is to be carried out. They do not represent a new programme of support for a particular sector or a forecast of future economic conditions.
Inflation remains the central constraint
In its assessment of the economy, the Committee said activity was expanding at a strong pace. It described domestic spending as resilient, productivity growth as strong and capital investment as robust. Job gains had kept pace with the workforce, while the unemployment rate had changed little.
At the same time, it said uncertainty remained elevated, partly because of geopolitical developments, and that inflation remained elevated. Policymakers said that further information would help them determine the stance needed to return inflation to their 2 per cent objective in a timely way.
The split vote underlines that agreement on leaving the range unchanged did not mean agreement about the preferred immediate direction. Cook and Hammack each favoured lifting the range by 0.25 percentage points. Their position did not prevail, so the target remains where it was, while the reserve-balance rate remains at 3.90 per cent.
The decision sets the operating terms from 29 October but does not commit policymakers to a particular outcome at a future meeting. Further choices will depend on their assessment of inflation, employment, economic activity and the information available at the time.
