The Fed is taking a Shakespearean attitude toward the exit: monetary tightening, a necessary end, will come when it will come.
But while the US central bank has made clear that the timing of the exit is still unknown, it’s taking steps to get ready for it when it comes.
It announced today the timing of the three initial trial term deposit auctions, the first of which will take place on June 14.
The Fed created the Term Deposit Facility at the end of last month. Eligible institutions will be able to deposit funds for a pre-determined period of time – no more than one year – into an interest bearing account. The interest will encourage institutions to leave their money with the Fed, rather than lend it out, drying up liquidity.
Along with reverse repos and paying interest on banks’ holdings of reserve balances, term deposits are set to be one of the Fed’s main tools for monetary tightening. In preparation for the exit, the Fed last autumn also began testing reverse repos, where it sells Treasuries or other assets to dealers for cash, with an agreement to buy them back later at a slightly higher price. It also raised the discount rate – the rate at which depository institutions borrow reserves from the Fed – which remains 25 to 50bp closer to the federal funds rate – the main policy rate at which banks lend funds to each other overnight – than it did at the start of the crisis.
