In order to assist drain cash from the system of banking and maintain short-term interest rates on target when it alters from the present cheap-money strategy, the US Federal Reserve is considering a new tool. According to the reliable source, this is revealed on Wednesday from the Fed’s meeting on July strategy.
Policymakers of FED concise the July 30-31 meeting that discuss on the prospective for generating the advantage of fixed-rate for reverse repos or overnight reverses repurchase agreements. head of U.S. interest rates strategy at SG Corporate & Investment Banking in New York, Mary Beth Fisher, stated that the policymakers are creating the situation for an eventual strategy that would tighten by sometime in 2015.
It is informed that to maintain short-term interest rates in the time when the central bank is prepared to normalize the rates from the lowest levels, Reverse repos combine with the interest the FED offers the excess reserves and the benefit of term deposit as tools.
Almost 21 dealers, among them most are Wall Street organizations, conduct direct business with FED. It is reported that FED would increase the number of participants in addition to the above-mentioned 21 dealers so that the amount of cash in the financial system could be reduced.
It is noteworthy that the counterparties for reverse repos include money market funds, US subsidiaries of Foreign banks, agencies of mortgage finance Freddie Mac and Fannie Mae. The report of Fed stated that participants of meeting pointed out that they considered such facilities to be effective.
A new almost zero interest rate policy is adopted by the FED in December 2008 that is aimed to maintain the federal rate between banks that ranges the rate from zero to 0.25 percent.
It is worth to mention over here that in the overnight reverse repo transaction, the FED usually sells a Treasury bond to money market fund or a primary dealer of US market and purchases it back the next day for a bit higher price. The fund or the dealer earn interest in the transaction but the banking system loses money although on a temporarily basis.
Critics are of the opinion that reverse ropes is going to be an important money market investment as the amount of ultra-short debt issued by mortgage finance agencies and the US government is supposed to decrease. They also opined that if this reverse repo facility is adopted by the Fed; it would make it easier to involve large-scale reverse repos among all counterparties.
Rates and rate derivatives strategist at UBS in Stamford, Connecticut, Boris Rjavinski, stated that the Fed wishes to simplify the mechanics of transactions. He thinks that this monetary strategy could affect the rates of money market.
It is revealed in the minutes of the Fed that they have plentiful assets to shrink money supply after quantitative easing or massive bonds purchases of three rounds. It is informed that these changes have created three times change in the size of the Fed’s balance sheet. Presently, the balance sheet of Fed contains the amount of $3.6 trillion along with $2 trillion in Treasuries securities.
The spokesperson of the Fed informed that it is not any indication about Fed’s tightening strategy although they decide to decrease its $85 billion purchasing of monthly bond by the end of this year.
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