Fed makes key adjustment in effort to keep rates in line

The Federal Reserve made a technical adjustment Wednesday to help insure that its benchmark interest rate stays within the range that the central bank wants.

For the second time this year, the Fed raised the rate it pays on bank reserves by 20 basis points, rather than the 25 basis point hike it approved for the federal funds rate.

The new reserve rate, known as the interest on excess reserves, or IOER, is 2.4 percent. The funds rate new target range is 2.25 percent to 2.5 percent.

The Fed uses the IOER as a kind of baseline for the funds rate. It looks to keep the funds rate below the IOER, but the funds rate has been creeping toward the top of its range. Prior to Wednesday's hike, the funds rate had been trading at 2.2 percent, equal with the IOER and just below the top end of its targets range.

If the funds rate would exceed the IOER, that could prompt banks to start draining excess reserves at the central bank, causing an excess of money supply in the system and pushing the funds rate still higher.

Fed officials have been trying to get a gauge on how much excess reserves banks are comfortable with. That's important as the central bank continues to reduce the size of its balance sheet by $50 billion a month. Should the funds rate keep pushing higher, that could force an early exit from the balance sheet reduction program, though Fed officials say the process continues to run efficiently.

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