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Federal Reserve may make rate adjustment, experts say

By
Clyde Hughes
The Federal Reserve is not expected to raise key interest rates at the end of its two-day policy meeting Wednesday. File Photo by John Angelillo/UPI
The Federal Reserve is not expected to raise key interest rates at the end of its two-day policy meeting Wednesday. File Photo by John Angelillo/UPI | License Photo

April 30 (UPI) -- The Federal Reserve begins its two-day policy meeting Tuesday, at the end of which no major rate action is expected -- but some experts think one figure could be adjusted.

Most analysts don't expect the Fed to move on another rate hike, but there is one interest rate target that could be adjusted.

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Tuesday's will be the Federal Open Market Committee's third meeting this year. The previous two did not raise the benchmark federal funds rate, but analysts believe this time the central bank could make a reduction to its little-known interest rate on excess reserves, or IOER -- the rate paid on balances above the level of reserves a depository institution is required to hold.

Experts say a possible .05 percent reduction to the IOER is on the table -- a move to keep the federal funds rate from getting too close to the top end of the target range. Economists at JPMorgan expect a 33 percent chance the Fed makes a move while BMO analysts feel it won't happen until the next meeting in June.

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Most experts believe the Fed should keep the federal funds rate, the main indicator of overall economic health, at the 2.25 to 2.5 percent range. The reserve has hinted it could hold the rate at that level through 2021. The last hike came in December.

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The U.S. economy's hefty growth over the first quarter of 2019 is one of the main reasons analysts don't expect a hike Wednesday.

Another thing possibly on the Fed's agenda this week is creating a standing repo facility, a move that would allow banks to exchange Treasuries for reserves. The action would encourage banks to hold fewer reserves, allowing the Fed to reduce its balance sheet.

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Economist David Andolfatto and Jane Ihrig floated the idea in two papers, but some worried the move would tinker too much with financial markets.

"With this facility in place, banks should feel comfortable holding treasuries to help accommodate stress scenarios instead of reserves," they wrote last month for the St. Louis Federal Reserve. "The demand for reserves would decline substantially as a result. Ample reserves - and therefore the size of the Fed's balance sheet - could, in fact, be much closer to their historical levels."

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