The Federal Reserve Board approved a final rule amending Regulation D (Reserve Requirements of Depository Institutions) to make changes to the calculation of interest payments on excess balances depository institutions maintain at Federal Reserve Banks. The rule went into effect July 23, 2015.
Under the former rule, if the rate of interest paid on excess balances (the IOER rate) changed in the middle of a two-week reserve maintenance period, the change wouldn’t have been fully reflected in the interest payments to depository institutions until the beginning of a new maintenance period. The new rule bases interest payments to institutions with excess balances on each day’s IOER rate and level of balances held, rather than the average IOER rate and level of excess balances over the maintenance period.
The Fed intends to enhance the effectiveness of changes in the IOER rate by moving the federal-funds rate into the target range the Federal Open Market Committee established when changes in rates don’t coincide with the beginning of a maintenance period.