FT: RRPs for Life?
The Financial Times published, "RRPs for Life?," which features an interview with New York Fed President William Dudley. The article says, "The timing of the Fed's initial rate hike and the subsequent path of future hikes are prominent unknowns on the minds of market participants and commentators. But the question of mechanics -- how the Fed will raise rates -- also matters. Our colleague Sam Fleming recently interviewed New York Fed president Bill Dudley and asked him about the possibility of the Fed's maintaining a larger balance sheet indefinitely in conjunction with the use of its reverse repo facility. His answer suggested that the central bank remained undecided. Q: Do you think in the longer-term, the new normal for the Fed balance sheet in 2020 onwards would be a larger balance sheet than in the past? A: It is really premature to say. We are going to learn a lot about running monetary policy with a large balance sheet, using the overnight RRP and interest on excess reserves as our primary tools to affect the federal funds rate target. As we learn that that will probably affect our judgment about whether it would be better to go back to a corridor system, with a very small amount of reserves in the system, or whether it would be better to have a greater amount of reserves and rely on these interest rate instruments to guide the stance of monetary policy. `My personal opinion -- not the committee's opinion -- is [the] jury's out. We are going to learn a lot. Let's learn and then decide and not make any judgments today.... And the other question is how big is big enough. I would be shocked if we wanted to run a $4.5 trillion balance sheet. The question is how much excess reserves would you want in the system if you wanted to run with a system based on interest rates being your primary instrument of policy." The piece continued, "Janet Yellen herself has been less keen on using the RRPs indefinitely than Ben Bernanke would be, as she confirmed again during her most recent press [comments].... So, with respect to -- you asked first about overnight reverse repos. And we communicated in our minutes that the Committee has an intention to make sure that they are available -- overnight repos are available in large quantity at liftoff to ensure that we have a smooth liftoff, that there will be an elevated level of provision of overnight RRP. However, it is our expectation and plan that fairly quickly after liftoff we will reduce the level of the overnight RRP facility, and we have a variety of ways in which we can do that."
