Federal Reserve Preparing New Repo Tool

The Federal Reserve’s point person in financial markets on Monday gave a strong and detailed endorsement of a proposed tool for smoothing the eventual tightening of U.S. monetary policy.

The tool — known as a fixed-rate full-allotment reverse repo facility — “offers a promising new technological advance” for conducting policy, Simon Potter, who runs the New York Fed’s market operations, said in remarks to bond traders.

Potter’s full-throated backing of the facility could pave the way for full adoption by the Federal Reserve. The speech comes nearly three months after Fed policymakers decided to start testing it as a way to better control short-term interest rates when the time comes to raise the key federal funds rate.

The U.S. central bank has kept the federal funds rate near zero since late 2008 to help the economy recover from recession and has promised to keep it there for a while longer, probably until 2015. Since banks are sitting on so much pent-up reserves, there is a fear that a policy tightening will spark chaos in so-called repo markets.

via Reuters

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