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MUSEUM & GOLD TOUR REGIONAL ECONOMY DATA & STATISTICS CAREERS BLOG PRESS CENTER search home > markets & policy implementation > FAQs about Interest on Reserves and the Implementation of Monetary Policy- Federal Reserve Bank of New York RELATED NEW YORK FED CONTENT RELATED EXTERNAL CONTENT 1. How will the payment of interest on reserve balances be administered? Detailed answers to questions about how the payment of interest on reserve balances will be administered and interest payments calculated can be found on the the Federal Reserve System Reporting and Reserves website. What’s most critical for the implementation of monetary policy is that interest will be paid on the excess balances depository institutions hold, i.e., the amount above the quantity of balances needed to satisfy their reserve requirements (which will also be remunerated), and their clearing balances (which will continue to earn implicit interest in the form of earnings credits). 2. How will authority to pay interest on reserves be helpful in implementing monetary policy? The Open Market Trading Desk (Desk) at the Federal Reserve Bank of New York is authorized to arrange open market operations in accordance with the operating directive of the Federal Open Market Committee (FOMC), which sets a target for the federal funds rate. Without authority to pay interest on reserves, from time to time the Desk has been unable to prevent the federal funds rate from falling to very low levels. With the payment of interest on excess balances, market participants will have little incentive for arranging federal funds transactions at rates below the rate paid on excess. By helping set a floor on market rates in this way, payment of interest on excess balances will enhance the Desk’s ability to keep the federal funds rate around the target for the federal funds rate. 3. Why is the payment of interest on reserve balances, and on excess balances in particular, especially important under current conditions? Recently the Desk has encountered difficulty achieving the operating target for the federal funds rate set by the FOMC, because the expansion of the Federal Reserve’s various liquidity facilities has caused a large increase in excess balances. The expansion of excess reserves in turn has placed extraordinary downward pressure on the overnight federal funds rate. Paying interest on excess reserves will better enable the Desk to achieve the target for the federal funds rate, even if further use of Federal Reserve About the Markets & Policy Economic Financial Institution liquidity facilities, suchImplementation as the recently announcedResearch increases in the amounts being New York Fed Supervision offered through the Term Auction Facility, results in higher levels of excess balances. Financial Services & Infrastructure Outreach & Education