It is not surprising that there was little new in the minutes from the FOMC’s March meeting, despite the fact that there were some modifications in the Summary of Economic Projections, which have been widely discussed in the press. However, there are a few nuggets of interesting and/or new information hidden in the details. In particular, the reports delivered by the manager and deputy manager of the Open Market Desk provide some insights into how the Fed’s policy tools interact and the steps the Desk is taking to be prepared for contingencies, should adverse pressures develop in financial markets.
The managers’ discussion focused on the implications of the expansion of the Fed’s balance sheet relative to the $200 billion recent decline in Treasury bills outstanding It was noted that reserve balances are now at $3.7 trillion and that reserves increased by more than $400 billion in the intermeeting period. The combination of shrinkage of outstanding bills and increase in reserves put some downward pressure on the effective federal funds rate and even more pressure on repo rates. A continuation of the expansion of the balance sheet would likely put even more downward pressure on short-term rates, and the implication is that usage of the overnight reverse repo facility (ON RRP) would expand. In anticipation of that potential development, the Desk reviewed the existing facility and proposed changes that might be required to improve the functioning and availability of the facility. As structured, the facility provides a way for primary dealers, money market mutual funds, and similar money market lenders to invest overnight by buying securities from the Fed and selling them back the next day. The Desk argues that the facility “enhances lenders’ bargaining power in negotiating rates on short-term private investments and thus helps to establish a floor on overnight money market rates.” Thus the facility can act to counter downward pressure on rates that would otherwise result from continued expansion of the Fed’s balance sheet. In anticipation of further expansion, the Desk proposed raising the $30 billion limit to individual counterparties to $80 billion. The rationale was that the balance sheet and market had grown significantly since the $30 billion limit was put in place several years ago and that the new limit would be of the same relative size as the $30 billion limit was when it was initially put in place. The Desk managers also noted that market participants anticipated changes in the rate on excess reserves and possibly in the ON RRP rate as well. What we can glean from this discussion in the minutes is that the Desk is engaging both in forward planning and in treating the ON RRP as a complement to the Desk’s operations in the overnight funds market, with one tool supplementing and supporting the functioning of the other.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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