The US Federal Reserve announced on Wednesday that it has approved raising the primary credit rate by 0.25 percent, bringing it to 5.5 percent, a change decided by the Federal Open Market Committee (FOMC).
In a statement made available on its website, the U.S. Apex Bank Board of Governors said that it has directed the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account.
It said, “Effective July 27, 2023, the Federal Open Market Committee directs the Desk to:
“Undertake open market operations as necessary to maintain the federal funds rate in a target range of 5-1/4 to 5-1/2 percent.”
The Fed said that it is henceforth allowing banks to borrow money from it for one night (overnight) through an arrangement called a “repurchase agreement.” Banks need to offer an interest rate of at least 5.5 percent, and the total amount of money the central bank is willing to lend is limited to $500 billion.
The bank agreed that this way it would be able to control the economy’s money supply and ensure that banks have enough funds to operate. This takes into consideration the recent bank failures in the country.
It explained that “Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.5 percent and with an aggregate operation limit of $500 billion.
“Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.3 percent and with a per-counterparty limit of $160 billion per day.”
The Fed added that it will replace expiring government bonds with new ones through auctions, but only if the maturing bonds exceed $60 billion each month. If the amount is higher, they’ll exchange Treasury bonds. If it’s lower, they’ll exchange Treasury bills instead.
The statement also read, “Reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month.
“Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons.
Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency MBS transactions.”