Consequently, when the time came to remove accommodation, a key question for the Committee was how to raise the federal funds rate in an environment of abundant reserves.10 An important part of the answer to that question came in the Federal Reserve’s authority to pay interest on excess reserves. The Congress granted the Federal Reserve that authority in 2006, to become effective in 2011.
However, in the fall of 2008, the Congress moved up the effective date to October 2008. Having authority to pay interest on excess reserves means that the Federal Reserve can influence the federal funds rate and other short-term interest rates regardless of the amount of excess reserves in the banking system.