WASHINGTON — The Federal Reserve adopted a plan on Friday allowing banks to set up the equivalent of certificates of deposit at the central bank. The move will help the Fed mop up money pumped out during the financial crisis and prevent inflation from taking off.
Under the plan, the Fed will offer so-called "term deposits" that will pay interest. Doing so will provide banks with another incentive to park their money at the Fed, rather than having it flow back into the economy.
Once the economy is on firm footing, the term deposits program will be one of the Fed's tools for tightening credit.
The Fed said the announcement has "no implication for the near-term conduct of monetary policy."
The plan doesn't come as a surprise. The Fed has been working on it for months.
Now that the economy is recovering from a deep recession, the Fed is getting its tools ready to soak up the unprecedented amount of money it injected into the economy during the crisis. The Fed's balance sheet has ballooned to $2.3 trillion as the result of its efforts to nurse the economy back to health.
The Fed said details about the program would be provided later.
The Fed has proposed that the interest rates paid on the term deposits be set through an auction mechanism. Banks wanting to hold a term deposit would bid in regularly scheduled, competitive auctions, where the lowest rate would prevail. The Fed said it anticipates that the maturities of the term deposits will be six months or less.
In coming months, the Fed hopes to conduct "small-value offerings" of term deposits to make sure operations go smoothly and to give banks an opportunity to get familiar with the program.