Fed ready to use Reverse REPOs to mop up some excess liquidity in Dec 2009

Central bank prepares to launch a series of reverse repos with primary securities dealers

By Associated Press
November 30, 2009 Post a Comment Recommend


The Federal Reserve is fine-tuning a strategy to reel in some of the unprecedented amount of money that's been pumped into the economy during the financial crisis.

The Federal Reserve Bank of New York said Monday that investors and others shouldn't conclude anything about when the central bank will reverse course and start boosting interest rates and removing other supports to fend off inflation.

The upcoming operations will involve so-called reverse repurchase agreements. That's when the Fed sells securities from its portfolio, with an agreement to buy them back later.

Reverse repos are one tool the Fed can use to drain some money it has plowed into the economy to ease financial troubles.

The operations will be "extremely small" and won't affect the Fed's key interest rate, officials said. They wouldn't say what the amount for the operations would total.

Fed officials also said they didn't know when the first operation would be conducted and how many there would be. The operations will be conducted to "to ensure operational readiness" at the Federal Reserve, the New York Fed said.

They don't "represent any change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future," the New York Fed said. The operations were designed to "have no material impact .... on market rates," the Fed added.

Michael Feroli, economist at JPMorgan Chase, agreed.

"They want to test everything and make sure it works so that when the time comes to raise rates ... they know they can do it," he said.

Reverse repos have been in the Fed's toolkit for years as a way to mop up money in the economy and most recently were used in December 2008, the Fed said.

This time, though, the Fed is considering selling its securities to a broader set of investors — beyond the traditional big "primary" securities dealers such as Banc of America Securities, Citigroup Global Markets and JPMorgan Securities.


Fed Chairman Ben Bernanke has said large-scale reverse repos can be done with banks, Fannie Mae and Freddie Mac and other institutions. Some analysts have said they might involve money market mutual funds. Monday's statement, though, said the upcoming operations will be conducted with the big primary securities dealers.

To foster the recovery, the Fed earlier this month decided to leave a key bank lending rate at a record low near zero and pledged to hold it there for an "extended period." Many economists predict rates will stay at such low levels through this year and part of next year.

The central bank's balance sheet has ballooned to over $2 trillion — reflecting the special programs it has set up to spur lending, stabilize banks and revive the economy. That's more than double the amount from before the financial crisis struck.

One big challenge for the Fed is deciding when to start boosting rates and when to remove economic and financial supports. Removing the supports too soon could derail the recovery. Leaving the supports in place too long risks unleashing inflation.