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Comment: FOMC effectively establishes facility for routine overnight and term repurchase operations

In the minutes of the September 17-18 FOMC meeting that were released on October 9 it was noted, “Several participants suggested that such a discussion could benefit from also considering the merits of introducing a standing repurchase agreement facility as part of the framework for implementing monetary policy.

On October 11, the Federal Reserve announced that the FOMC had instructed the Federal Reserve Bank of New York to purchase Treasury bills “at least into the second quarter of next year [2020] in order to maintain over time ample reserve balances at or above the level that prevailed in early September 2019”. This would be the level prior to the cash crunch in mid-September that prompted the New York Fed to begin holding overnight repurchase operations and later also term repurchases. It also instructed the New York Fed to “conduct term and overnight repurchase agreement operations at least through January of next year [2020] to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities and to mitigate the risk of money market pressures that could adversely affect policy implementation.”

Given the timeframe, these “purely technical measures to support the effective implementation of the FOMC’s monetary policy” is a de facto establishment of a standing repurchase agreement facility. The FOMC will probably discuss further details at the next meeting or two (October 29-30 and December 10-11), but it would be a surprise if the purchases were not made permanent in a facility close to the details announced by the Federal Reserve Bank of New York on October 11. The New York Fed will buy Treasury bills “at an initial pace of approximately $60 billion per month beginning with the mid-October to mid-November period. These purchases will be “in addition to the Desk’s ongoing purchases of Treasury securities related to the reinvestment of principal payments” of current holdings of Agencys and Agency MBS.

The FOMC was clear that the announcement does not constitute a monetary policy action. Rather, it is managing the balance sheet in ample reserve environment and to avoid fluctuations in administered short term rates at times when money markets might feel pinched. This doesn’t change decisions made about balance sheet normalization, its march to all Treasurys and eventually mirroring public Treasurys outstanding in the maturity in its holdings, or how the FOMC may deploy asset purchases to provide accommodation in an economic downturn.

For a history of the Federal Reserve’s asset purchase programs, please see the Whetstone Analysis Reference Library.

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