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The Fed's new tool: Negative interest rates?

Federal Reserve Board Chairman Ben Bernanke leaves after a meeting of the Financial Stability Oversight Council July 18, 2012 at the Treasury Department in Washington, D.C.

Jeremy Hobson: The Federal Reserve meets again this week, and the buzz is that Chairman Ben Bernanke could be considering some "new tools," for stimulating growth -- perhaps using interest rates to encourage banks to take some risks with their money.

One way to do that, is to make the interest rate negative -- as Marketplace's Krissy Clark reports.


Krissy Clark: The interest rate we're talking about here is the one the Fed offers banks to hold something called "excess reserves." That's the extra money banks keep just in case a whole bunch of people decide to withdraw cash all at once.

As a safety measure during the financial crisis, the fed was offering a bit of interest on those reserves -- a sort of reward for being cautious, according to Loyola Marymount economist James Devine.

James Devine: Which means that they're not lending out that money.

And that's become it's own problem -- because as you may have noticed, ithese days it's hard for anyone to get a loan; to buy a house, or start a business; or do something -- anything -- that might stimulate the economy.

So, what the Fed could do now, says university of Oregon economist Tim Duy is lower the interest rate on those reserves.

Tim Duy: And in theory, you could make that that a negative number.

Meaning, basically, the Fed would be charging banks for keeping too many reserves. Which might goose them to start lending again.  

The risk with this tool? It might discourage banks from keeping any money at all in the Federal Reserve, and that could cause a whole other set of problems.

I'm Krissy Clark for Marketplace.

About the author

Krissy Clark is the senior reporter for Marketplace’s Wealth & Poverty Desk.

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