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Friday, August 23, 2013

Federal Reserve Considers Adding Additional Rate Tool

In the FOMC minutes, Federal Reserve policymakers reviewed the possibility of adding a tool that would help them manage money market interest rates. The report dealt with the potential for establishing a “fixed-rate, full-allotment overnight reverse repurchase agreement facility.” The FOMC members “thought such a facility could prove helpful; they asked the staff to undertake further work to examine how it might operate and how it might affect short-term funding markets.”

Such a tool would allow the Federal Reserve to “offer an overnight, risk-free instrument directly to a relatively wide range of market participants. The FOMC noted that this tool could compliment the current ability to control interest rates paid on excess reserves held by banks, and would improve the Committee’s ability to control short term rates.

In support of the Committee’s longer-run planning for improvements in the implementation of monetary policy, the Desk report also included a briefing on the potential for establishing a fixed-rate, full-allotment overnight reverse repurchase agreement facility as an additional tool for managing money market interest rates. The presentation suggested that such a facility would allow the Committee to offer an overnight, risk-free instrument directly to a relatively wide range of market participants, perhaps complementing the payment of interest on excess reserves held by banks and thereby improving the Committee’s ability to keep short-term market rates at levels that it deems appropriate to achieve its macroeconomic objectives. The staff also identified several key issues that would require consideration in the design of such a facility, including the choice of the appropriate facility interest rate and possible additions to the range of eligible counterparties. In general, meeting participants indicated that they thought such a facility could prove helpful; they asked the staff to undertake further work to examine how it might operate and how it might affect short-term funding markets. A number of them emphasized that their interest in having the staff conduct additional research reflected an ongoing effort to improve the technical execution of policy and did not signal any change in the Committee’s views about policy going forward.


Read the full FOMC minutes.

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