Fed makes technical adjustments to keep benchmark rate within target range

(Reuters) – The Federal Reserve on Wednesday made technical adjustments aimed at keeping its key overnight benchmark interest rate from falling too low.

The Fed raised the interest rate it pays banks on reserves held at the U.S. central bank at the end of its two-day policy meeting. It also lifted the rate it pays on overnight reverse repurchase agreements, a tool used to set a floor on short-term interest rates.

The rate on reserves – known by the acronym IOER – will rise by five basis points to 0.15%. The rate paid on reverse repo operations, which gives financial firms a place to temporarily park cash in exchange for a return, will increase to 0.05% from zero.

Use of the reverse repo facility surged to new highs in recent weeks as money market funds and other eligible firms struggle to find places to invest their excess cash. Firms parked a record $583.9 billion in cash with the New York Fed overnight on Monday and stashed about $500 billion overnight with the Fed on both Tuesday and Wednesday.

Short-term interest rates are drifting lower in part because of the Fed’s $120 billion in monthly bond purchases, a surge in bank reserves and a big drop in the federal government’s cash stockpile as it doles out pandemic relief payments and tax refunds.

The fed funds rate, which the central bank on Wednesday kept in a target range of 0-0.25%, briefly dipped to 0.05% at the end of May and has held steady at 0.06% since early June.

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