Economists polled by Bloomberg don't expect the Fed to raise interest rates til after November's elections. But the Fed is already puzzling over how best to raise and control rates - and prevent banks from lending too much when the economy finally turns around - despite Obama's concern that banks still aren't lending enough.
As the Federal Reserve Open Markets Committee starts its two-day January meeting, Fed policymakers "are considering adopting a new benchmark interest rate to replace" the federal funds rate, which "they’ve used for the last two decades," reports Bloomberg here. But the Fed "has been unable to control the federal funds rate since the September 2008 bankruptcy of Lehman Brothers Holdings Inc., when it began flooding financial markets with $1 trillion to prevent the economy from collapsing."
Instead, the Fed "may replace or supplement the fed funds rate with interest paid on excess bank reserves," which have swollen the Fed's balance sheet since the 2008 credit crisis. "Fed Chairman Ben S. Bernanke, in July Congressional testimony, called interest on reserves 'perhaps the most important' tool for tightening credit...
"Banks’ excess reserves, or deposits held with the Fed above required amounts, totaled $1 trillion in the two weeks ended Jan. 13, compared with $2.2 billion at the start of 2007. The Fed created the reserves through emergency loans and a $1.7 trillion purchase program of mortgage-backed securities, federal agency and Treasury debt. By raising the deposit rate, now at 0.25 percent, officials reckon banks will keep money at the Fed and not stoke inflation by lending out too much as the economy recovers..." Emphasis added.