How Much Do Your Accounts Cost?

November 25, 2013 at 8:39 am Leave a comment

The minutes from the most recent FED Open Market Committee meeting are getting a lot of attention (http://www.zerohedge.com/news/2013-11-24/banks-warn-fed-they-may-have-start-charging-depositors), not because of the increasingly redundant debate about if and when the FED will “taper” its bond buying program, but because of the FED’s discussion of what it will do to keep downward pressure on interest rates even after its bond buying binge ends.  Specifically, this passage is getting some major banks riled up:

Participan​ts also discussed a range of possible actions that could be considered if the Committee wished to signal its intention to keep short-term rates low or reinforce the forward guidance on the federal funds rate. For example, most participan​ts thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considerin​g at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions​. By contrast, participan​ts expressed a range of concerns about using open market operations aimed at affecting the expected path of short-term interest rates, such as a standing purchase facility for shorter-te​rm Treasury securities. . . (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20131030.pdf)

By way of background, the interest on excess reserves is the interest that FED banks pay to financial institutions for holding their excess reserves.  Keep in mind that the FED has always sought to underscore its intention to keep interest rates low long after the bond buying ends.  This may seem like an obvious point, but when conventional wisdom was that tapering was imminent over the summer, there was also speculation that the FED would soon raise interest rates.  As a result, the FED’s comments are best understood as part of a wider discussion about how to make sure its interest rate intentions are abundantly clear.

Still, the suggestion that the FED might cut back on the interest it pays for these funds has gotten “leading banks” to publicly state that they would start charging depositors for the right to deposit their money if the FED cuts its own interest payments.

To be sure, accounts cost money.  But I just can’t wait to see the backlash as bankers try to explain to the public why it simply isn’t worth it to take their money.  Instead of the FED coming up with new and creative ways to unofficially cap interest rates even after the tapering has ended, why doesn’t it just continue the tapering program?  It might seem like an awfully simplistic way of looking at things, but it’s not too difficult to figure out that we have a sluggish economy and a continuing need to encourage lending and investment.

On that note, have a happy Monday and remember the holiday season is just three days away.

Entry filed under: Economy, General. Tags: , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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