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Fed Asks Congress for Power to Pay Interest on Reserves Sooner

May 6 (Bloomberg) -- The Federal Reserve, seeking ways to stabilize money markets, is seeking approval from lawmakers to begin paying interest on commercial-bank reserves, said a person familiar with the discussions.

The central bank isn't authorized by Congress to begin paying such interest until 2011. Gaining such power may allow the Fed to pump more funds into the banking system without pushing interest rates lower.

The Fed's Board of Governors discussed the matter in a closed session April 30. The Federal Open Market Committee, which includes governors and presidents of the 12 district banks, cut its benchmark federal funds rate to 2 percent the same day.

Interest payments would probably set a floor for the federal funds rate. Currently, a temporary glut of funds can drive the rate below policy makers' target as banks seek a return on their cash, Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, said in an interview last week.

Under the current statute, the Fed may pay interest ``at a rate or rates not to exceed the general level of short-term interest rates'' starting in October 2011.

The central bank has lowered the main rate by 3.25 percentage points since September to ease financial-market strains and stave off a recession. The New York Fed bank's Open Market Desk is charged with buying and selling Treasuries with 20 Wall Street securities firms to keep the rate close to the target set by the FOMC.

The Fed has already started three programs aimed at getting funds to the financial system more effectively: auctions of cash loans to banks, auctions of Treasuries to bond dealers and opening up lending to the same institutions.

The central bank's request to Congress was previously reported by the Wall Street Journal today.