US central bank sticks to paying interest on reserves

Economy 7/13/2018, 5:41 PM
US central bank sticks to paying interest on reserves

The yield curve with government bonds of the United States has "shifted up and flattened somewhat further" in the first six months of the year, the Federal Reserve said on Friday in its semiannual report. It attributed the phenomenon to a boost to the plan for the supply in Treasuries, "increased concerns about trade policy," the political climate in Europe and overseas economic outlook. Policymakers defended their practice of paying interest on excess reserves to financial institutions which park cash at the central bank.

The tool is "essential" for anchoring the fed funds rate within the target range as otherwise the bloated balance sheet would have to be reduced more rapidly, increasing risk, the document adds and highlights the strategy of gradually rising interest rates at the same time. Banks could earn more elsewhere, it said.

Uncertainty is noted in the financial markets, according to the analysis, which points out valuations remain "elevated" in some sectors. Persistent strong demand should bring more prime-age workers to the workforce, with the help of the Fed, its officials asserted. The category's participation rate has been trending down since the dawn of the century, they said, but stressed its rise since 2013.

Breaking the News / IT

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