Federal Reserve Chairman Ben S. Bernanke, seeking ways to stabilize money markets, will ask Congress for authority to pay interest on commercial-bank reserves this year, a person familiar with the discussions said.
The central bank isn't authorized by Congress to begin making such payments until 2011. Allowing interest on bank reserves may enable the Fed to pump more funds into the banking system without pushing its main policy rate lower, in effect separating action to boost liquidity from monetary policy.
"It would have the effect of putting a floor under the federal funds rate," said Walker Todd, a research fellow at the American Institute for Economic Research in Great Barrington, Mass.
Bernanke has expanded the Fed's tools during the credit crisis, rolling out three new facilities aimed at getting funds to the financial system more effectively.
The Fed's Board of Governors discussed paying interest on reserves in a closed session April 30. The Federal Open Market Committee, which includes governors and presidents of the 12 district banks, cut the benchmark federal funds rate a quarter of a point to 2% the same day.
Banks are required to hold a proportion of customers' deposits in an account at the Fed. In addition, they hold reserves in excess of their required balances to meet payments.