Stop the Presses! or, How the Fed Can Avoid Reserve Shortages without Bulking-Up, Part 1

George SelginThe FOMC should forget about r* for the moment and focus on … the supermassive black hole at the center of global dollar funding markets.–Zoltan Poszar, 21 August, 2019A few weeks ago, as part of its effort to prevent overnight rates from rising above the Fed's target range, and especially to avoiddramatic overnight rate spikes like the one that occurred in mid-September,the Fed announced that it would soon begin acquiring assets again. Over the course of the next two quarters, the Fed plans to purchase $60 billion in Treasury securities each month, or a total of somewhere between $250 and $300 billion, adding as many reserves to the banking system. By so doing, it will undo about two-thirds of the balance-sheet unwind that began in October 2017 and ended last September. And many experts expect the Fed to end up acquiring considerably more than $300 billion in new assets.What the Fed hasn't been telling anyone is that it doesn't have to fatten-up to solve the reserve shortage. "If the answer to the problem of overnight interest rate control is more reserves,"Stephen Williamson observed last month,that can be achieved by reducing the size of the foreign repo pool and the Treasury's general account, which together currently come to a total of about $672 billion. That's a lot larger than the $300 billion in T-bills the Fed plans on purchasing. The size of the foreign repo pool and the Treasury's general account are purely discretionary, and both were tiny before...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs