Off The Wire
U.S. Fed may tweak key 'reverse repo' rate: minutes
Trevor Hunnicutt, Richard Leong
NEW YORK (Reuters) - The Federal Reserve may consider tweaking how much it pays mortgage agencies, money market funds and other non-banks in certain Treasury-backed transactions, the U.S. central bank’s minutes released on Wednesday showed.
The minutes also showed that the Fed’s current patient approach to setting monetary policy could remain in place “for some time.”
The Fed uses what is known as a reverse repurchase agreement (repo) program to control interest rates.
Reverse repos, together with the interest the Fed pays banks on reserves they keep at the Fed and the term deposit facility, helped the Fed manage short-term interest rates after it raised them from rock-bottom levels after the 2008 global financial crisis.
By controlling short-term rates, the Fed hopes to influence the broader economy to maximize employment and keep inflation near its target.
The goal was for the reverse repo transactions to set a “floor” below which short-term rates would not fall. But policymakers do not want too many institutions to participate because, among other risks, that could draw money out of markets where people borrow.
More than three years since the Fed moved away from its near zero-rate policy, there have been instances where short-term rates, most notably the federal funds rate, have come close to the top end of the Fed’s target range.
Short-term rates spiked last month as people withdrew money to pay tax bills, forcing banks to pay more for liquidity, Reuters reported.
After the May meeting, the Fed tweaked the interest on excess reserves (IOER) for a third time since June 2018 without changing the policy rate in a bid to hold down borrowing rates.
“If it became appropriate in the future to further lower the IOER rate, the staff noted that the Committee might wish to first consider where to set the (overnight reverse repurchase agreement) offer rate” to mitigate the risk that too many institutions participate in the repo program, according to minutes of the Fed’s April 30-May 1 meeting.
Reporting by Trevor Hunnicutt and Richard Leong; Editing by Lisa Shumaker