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Wed, Dec 30, 2009 - Page 10 News List

US Fed may offer banks ‘term deposit’ incentive

EXPECTED The proposal was no surprise, as the Fed chairman had said ‘term deposits’ were one tool the Fed might use to drain money from the economy

AP , WASHINGTON

The Federal Reserve on Monday proposed allowing banks to set up the equivalent of certificates of deposit (CDs) at the central bank, a move that would help the Fed mop up money pumped into the US economy and prevent inflation from taking off later.

Under the proposal, the Fed would offer so-called “term deposits” that would pay interest. Doing so would provide banks with another incentive to park their money at the Fed, rather than having it flow back into the economy.

CD FOR BANKS

The proposal comes as no surprise. US Federal Reserve Chairman Ben Bernanke and other Fed officials have repeatedly said the creation of so-called “term deposits” — essentially the equivalent of CDs for banks — would be one of several tools the Fed could use to drain money from the economy when the time is right.

Against that backdrop, the Fed said the proposal “has no implications for monetary policy decisions in the near term.”

With both the economy and the financial system on the mend, the Fed this year started to wind down and scale back some emergency lending programs.

LENDING CONDITIONS

Many of those programs were set up at the height of the financial crisis in the fall of last year when some credit markets virtually shut down.

Lending conditions have improved but still aren’t back to normal.

They continue to restrain the economic recovery.

The Fed proposed that the interest rate paid on the term deposit be set through an auction mechanism.

The Fed said it anticipated term deposits with “relatively short maturities” likely ranging between one and six months. It said deposit maturities wouldn’t exceed one year, and no early withdrawals of money in the accounts would be allowed.

The public, the banking industry and other interested parties will be given an opportunity to weigh in on the proposal. The plan could be revised before a final rule is adopted.

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