Money markets fed seen refraining from reserve rate cut

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* Cutting IOER unlikely to lift lending - NY Fed blog * U.S. overnight repo rate unchanged * U.S. sells 3-month bills at same rate as last week * No dollar Libor fixings due to U. K. bank holiday By Richard Leong NEW YORK, Aug 27 The U.S. Federal Reserve will likely refrain from lowering the interest it pays on excess bank reserves as a tool to help the economy, while traders anticipate signs later this week for more monetary stimulus. Traders are focused on whether Fed Chairman Ben Bernanke will signal the central bank will soon buy more bonds to further reduce private borrowing costs in his speech at an event in Jackson Hole, Wyoming on Friday. There has been also chatter about lowering the interest the Fed pays on excess bank reserves (IOER) with the goal of reducing unemployment, which has been stuck above 8 percent. This view of cutting the IOER gained traction this summer after the European Central Bank dropped the rate it pays on excess bank deposits to zero. The Fed currently pays a quarter percentage point on IOER. But most analysts have downplayed the chances the Fed will cut IOER because with short-term U.S. rates already hovering near zero, such a move might cause more harm than good due to possible disruption to money markets. "The argument is not any better, but it's just more common," Alex Roever, short-term interest rate strategist at J. P. Morgan Securities in New York said of the speculation over IOER. On Monday, two Fed staffers weighed in on this issue. They said in a blog on the New York Federal Reserve website that cutting the IOER would do little to change the amount of reserves banks leave with the central bank. "The quantity of balances banks hold on deposit at the Fed would be essentially unaffected by a change in the IOER rate," wrote Gaetano Antinolfi, a Fed senior economist and Todd Keister of the New York Fed's research and statistics group. To be sure, lowering the IOER could exert downward pressure on interest rates in money markets, causing some banks to lend more to consumers and businesses, they said. But if lower IOER causes interest rates on U.S. Treasury bills, repurchase agreements and other money products to fall, investors would feel the squeeze. "It could bring repo rates to zero. I would hate for it to happen," said Jill King, senior portfolio manager at Horizon Cash Management in Chicago. The New York Fed blog provided fodder for traders in quiet trading, due partly to a U. K. bank holiday. Key money market rates on dollars were little changed from Friday's close. The overnight rate on repos, a key source of funding for Wall Street where it uses Treasuries and other investments as collateral in exchange for cash, was last quoted at 0.21 percent, unchanged from late Friday. The U.S. Treasury Department sold $32 billion of new three-month bills at an interest rate of 0.105 percent, matching the level set at last week's auction. Because of the bank holiday in Britain there were no London interbank offered rate fixings on the pound or the dollar.