Wells Fargo Advantage Money Market Funds' latest "Portfolio Manager Commentary" says, "Although it's early to expect the Fed to exit its easing programs -- after all, we just got here! -- the steps that it might take to unwind the quantitative easing and drain bank reserves are fairly well known, having been previously discussed here and in other places in more detail. Basically, there are three specific tools in the Fed's toolbox that could be used. The first are the Supplementary Financing Program (SFP) bills. In this program, the U.S. Treasury issues Treasury bills specifically for the purpose of leaving the proceeds on deposit at the Fed, moving money from the reserve balances category to another type of liability. While the SFP bills have been popular with market participants, the current collision with the debt ceiling precludes their use right now. The second method of draining reserves is the reverse repurchase agreement (RRP). In this arrangement, the Fed lends securities from its portfolio in exchange for cash, which comes from the RRP counterparties' bank accounts. Many money market funds, including certain Wells Fargo Advantage Funds, have already been approved to conduct RRPs with the Fed, and at the end of May it was announced that government-sponsored enterprises (GSEs) would be considered as counterparties. Clearly, the Fed is casting a wide net with the RRP program. The third method of draining reserves is the term deposit. Under this program, the Fed would take deposits from banks for a set period of time. This would have the effect of moving these funds from the reserve balances category to another category of liabilities. Moreover, although it has not been discussed as widely as the other alternatives, currency has a role here, too. If the demand for currency continues to increase, this would also drain excess reserve balances, which would take some pressure off these other alternatives."
