Fed Tinkers With Excess-Reserves Rate for Second Time This Year

(Bloomberg) -- The Federal Reserve on Wednesday made a technical realignment to one of its tools used to control its key benchmark rate in conjunction with its decision to tighten overall policy.

Fed officials voted to raise the interest paid on excess reserves by 20 basis points to 2.40 percent, effective Dec. 20, according to a note released in conjunction with the FOMC statement. Policy makers raised the overall target range for the fed funds rate by 25 basis points, and that now stands at 2.25 percent to 2.50 percent.

The central bank’s adjustment to IOER echoes a similar action it took in June in an effort to keep in check the rising effective fed funds rate. The benchmark has been drifting toward the upper end of the policy band for much of 2018 as a combination of surging Treasury-bill supply and the central bank’s balance-sheet unwind have driven U.S. money-market rates higher. The Fed had previously flagged that it could implement a change to IOER, potentially even outside of the FOMC’s regular meetings.

The rate on the Fed’s reverse repurchase agreement facility was increased to 2.25 percent from 2 percent.

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