Perhaps to offset rumours of further easing, the Fed has announced further trial runs of a key tightening tool.
The New York Fed will test one of its main liquidity-draining tools by conducting a “series of small-scale, real-value reverse repurchase transactions” with primary dealers et al. This repeats and expands upon a similar set of tests announced in October and run in December. Read more
Readying the drain
Baby steps.
The Federal Reserve today moved one – itty bitty – step closer to getting reverse repos ready to drain the system of excess reserves. Not that they’re in much of a hurry – monetary tightening still seems to be a long way off in the distance, but nice to be prepared. Read more
Fed expands reverse repos counterparties
The Federal Reserve Bank of New York said today that it would expand its counterparties for conducting reverse repurchase agreement transactions.
“This expansion is intended to enhance the capacity of such operations to drain reserves beyond what could likely be conducted through the New York Fed’s traditional counterparties,” the NY Fed said in a statement.
The NY Fed has been testing “reverse repos” since last December in preparation for eventual monetary policy tightening and as early as last October had announced that it would expand its counterparties for these transactions.
Reverse repos are one of the tools the Fed has said it plans to use to drain excess reserves from the financial system once it begins its exit strategy in earnest. But Ben Bernanke, Fed chairman, has made clear that he does not expect it to be the primary tool – rather, the Mr Bernanke intends to use the interest rate the Fed is paying on its holding of bank reserves to be the “most important” technique for draining the funds. Read more
Reversing the repo constraint
If the Fed is bothered about primary dealers lacking the balance sheet capacity to do reverse repos on a large scale, why not use its regulatory powers to ease these constraints? The Fed might want to do as much as $500bn in reverse repos. The dealers have balance sheet space for $100bn at most.
A short-term reverse repo with the central bank ought not to be the kind of asset a bank needs to set much capital aside for, nor the kind of asset that counts against crude leverage limits. I am not an expert on the regulatory side of this but I suspect the Fed might be able to do something about this if it put its mind to it. Read more
Fed and the money funds
The Fed would like to mop up a decent share of its excess reserves to reduce the pressure on the paid interest facility and it’s eying the money-market mutual fund industry to help, writes Krishna Guha of the Financial Times Read more
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Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS
Michael Steen, Frankfurt bureau chief, covers the ECB and the eurozone's economies. He joined the Financial Times in 2007 as Amsterdam correspondent and later worked as a front page news editor in London. Before joining the FT, he spent nine years as a correspondent at Reuters, mostly in foreign postings that included a previous stint in Frankfurt, as well as Moscow, Kiev and central Asia. He read German and Russian at Cambridge.RSS
Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS
Ralph Atkins, capital markets editor, has been writing for the Financial Times for more than 20 years following an economics degree from Cambridge. From 2004 to 2012, Ralph was Frankfurt bureau chief, watching the European Central Bank and eurozone economies. He has also worked in Bonn, Berlin, Jerusalem and Brussels. RSS
Claire Jones is Money Supply economics team writer, based in London. Before joining the Financial Times, she was the editor of the Central Banking journal and CentralBanking.com. Claire studied philosophy and economics at the London School of Economics. RSS
