Brian Sack, Executive Vice President of the Federal Reserve Bank of New York spoke last night at the Money Marketeers of New York University on "The Fed's Expanded Balance Sheet." He said, "As financial markets seized up last year and the economy sank to deeply negative growth rates, the Federal Reserve aggressively deployed a wide range of policy tools. It not only cut the federal funds rate all the way to its effective lower bound, but it turned to so-called unconventional monetary policy measures to stabilize the financial system and stimulate the economy. These measures had dramatic implications for the Fed's balance sheet."

Sack explained, "The initial expansion of our balance sheet was driven primarily by efforts taken to provide short-term funding to the markets. These facilities -- including the Primary Dealer Credit Facility, the Term Auction Facility, the foreign-exchange swaps with other central banks, the Commercial Paper Funding Facility, and the various money market support facilities -- were focused on extending credit at maturities of up to three months to various types of firms. These liquidity facilities were a key part of the government's efforts to restore stability to the financial sector.... [G]iving financial institutions greater confidence about their access to funding, and that of their counterparties, was a crucial step toward achieving stability. At this juncture, it is well appreciated that short-term funding markets are functioning much better and that liquidity pressures for most financial institutions have subsided."

He continued, "I would argue that creating these liquidity facilities and implementing them was a lot harder than exiting from them. In fact, the exit from these facilities to date has been fairly straightforward. Almost every facility was designed to provide a useful source of funding during stressed financial market conditions but to be an unattractive source of funding once markets returned toward more normal functioning. That structure has worked extremely well. Summing across these facilities, the total amount of credit extended has fallen from a peak level of $1.5 trillion late last year to around $160 billion today. We expect these balances to continue to decline over time, with many of the facilities set to expire on February 1."

Sack also said, "With that in mind, monetary policymakers have asked the Federal Reserve staff to develop the ability to offer term deposits to depository institutions and to conduct reverse repos with other firms. These tools are similar in nature, as they both absorb excess reserves by replacing them with a term investment at the Fed.... The development of both of these tools has made considerable progress. As indicated in the recent statement from the New York Fed, the Open Market Desk will soon begin conducting a series of small-scale, real-value term reverse repo transactions as part of our efforts to ensure the readiness of this tool. With the successful completion of those transactions, we will have achieved the operational ability to do term reverse repos with primary dealers against Treasury and agency debt collateral, using the triparty system for settlement."

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