Senior Federal Reserve staff proposed ending longer-term loans to banks after April as part of a broader blueprint laying out how the central bank could scale back the support provided to money markets, the minutes from the January policy meeting showed, APA reports citing Fox News.
The proposal, which received a warm reception from policymakers, explained how the Fed could gradually reduce interventions in the market for repurchase agreements, or repo, and slow its balance sheet expansion.
The central bank began the repo operations in mid-September, when a cash shortage led to a surge in short-term borrowing costs and caused the federal funds rate to trade outside of the Fed’s target range. The Fed is also purchasing $60 billion a month in short-term Treasury bills to raise the amount of permanent reserves in the banking system to a level where the interventions are no longer needed.
Lorie Logan, manager of the open market account at the New York Federal Reserve, told policymakers she expected the central bank could slow the pace of Treasury bill purchases in the second quarter.
In the meantime, the Fed could continue reducing the scale of its repo operations, with a plan to potentially phase out longer-term repo operations after April, the minutes showed.
The central bank began gradually reducing the size of its repo offerings this year after avoiding a potential repeat of money market volatility in December. This week, for example, the Fed lowered the maximum offerings to $100 billion for daily repo operations and to $25 billion for term operations.
The Fed is likely to offer some repo support at least through April to make sure there are enough reserves in the banking system during the tax season, Logan told officials. And after reserves return to “durably ample levels,” the Fed would only have to conduct market operations as needed to expand the balance sheet in line with the Fed’s liabilities.
Policymakers said they were “comfortable” with the proposal for bringing reserves back to ample levels, emphasizing once again that the efforts to boost liquidity are “technical” in nature and “not intended to represent a change in the stance of monetary policy.”
Several Fed officials also suggested that the committee should return “before long” to the discussion over a potential standing repo facility, which would allow banks to borrow reserves as needed at a fixed rate. Creating such a tool could reduce demand for reserves, some participants noted.