The Federal Reserve announced Monday that it wants public comment on changes to Regulation D (Reserve Requirements of Depository Institutions), which requires Reserve banks to pay one-quarter of a percent interest on “balances up to the top of the penalty-free band.” This reflects a bank’s reserve balance requirement, plus $50,000, or 10 percent of the balance, whichever is more.
It also wants to amend the way it calculates those rates.
The Fed wants to permit interest payments on certain balances to be based on a daily rate, rather than on a maintenance period average rate, as it has existed for years. It is proposing to rewrite rules defining interest on reserve-balance (IORR) and interest on excessive-balance (IOER) rates. These amendments, the board announced, would “help to enhance the role of such rates of interest in moving the federal funds rate into the target range established by the Federal Open Market Committee.”
This would be particularly true on occasions when changes in those rates do not coincide with the beginning of a maintenance period.
The Fed’s call for public input on the matter comes, not insignificantly, at a time when the central bank is under much scrutiny as it looks to set a new national interest rate. Last week’s report from the FOMC showed the Fed in the throes of indecision over whether to even raise the rate anytime this year. A new rate could come as early as June or as late as June of next year.
The call also comes at a time when the Fed’s power is being examined by federal lawmakers. This scrutiny could be the reason the Fed suggests that proposed changes to Regulation D would delete the provision “as determined by the Board from time to time” regarding interest rates. “The Board,” the report stated, “proposes to announce future changes to the IORR rate or the IOER rate, or to the mechanisms for calculating the interest on term deposits, through amendments to Regulation D.”