WSJ: Fed Sticking with RRP
The Wall Street Journal writes "Here's Why the Fed Will Stay Central to Markets. They say, "Federal Reserve officials grappling with the legacy of expansive stimulus would find it difficult to return to the central bank's precrisis role on the sidelines of financial markets, analysts and central-bank watchers say. A long list of programs adopted to help foster economic growth, along with changes in money markets and bank regulation, have vastly expanded the Fed's balance sheet and its involvement in markets. The Fed's assets now total $4.5 trillion, up from less than $1 trillion a decade ago. Since 2013 the central bank has become one of the largest traders with U.S. taxable money-market funds, according to Crane Data." The piece adds, "The ultimate size will be closely tied to which system the central bank decides to use to control interest rates in the future. A handful of Fed officials have already begun questioning the wisdom of returning to the blueprint for controlling rates that they used before the crisis, although they have more time to decide. At the center of the debate is a special investment program the Fed launched in 2013. Through the facility, it lends money-market funds and others Treasurys in exchange for cash, temporarily draining excess cash from money markets and discouraging lenders from lending at rates below the target range for interest rates. Initially, the central bank said it would reduce the capacity of this so-called reverse repo facility "fairly soon after" it had begun raising short-term rates in 2015. Today, the Fed has no current plans to do so. Mr. Dudley suggested in April the Fed likely wouldn't phase out the facility. Without the Fed repos, short-term rates could slip too low, and demand for Treasurys in the open market would surge, causing problems for money-market funds seeking alternative places to park cash overnight. Removing the program would "cause huge dislocations from a bond-market standpoint," said Debbie Cunningham, chief investment officer for global money markets at Federated Investors. A balance sheet that is smaller than today's, yet still substantial, would enable the Fed to keep the reverse repos around. It would also support the Fed's foreign repos for overseas accounts, where weekly balances have averaged $250 billion, up from $30 billion precrisis, as well as the $1.5 trillion in currency outstanding and changing cash-management policies at the Treasury Department."
