Fed Proposes Certificates of Deposit for Banks

http://cdrates.monitorbankrates.com   The Federal Reserve on Monday proposed timed deposits to mop up excess liquidity in the system. Banks will park their extra cash at the Federal Reserve Bank and earn interest in timed deposits just like a certificate of deposit.

Ever since the credit crisis and recession, the Fed has been very accommodating in its monetary policy to ease the crisis and get the economy growing again. Now that the Fed has achieved those goals, there is worry that all the extra money out there will cause inflationary pressures.

Setting up timed deposits for banks will ease some of that pressure without having to raise interest rates. Banks would place some of their cash reserves at the Fed and earn money instead of loaning the extra reserves and possibly causing another credit bubble and inflation.

The proposed timed deposits will probably have maturities of one month to six months. The interest rate would be determined by auction. Just like a certificate of deposit, banks would not be allowed to withdraw the funds until maturity.