NY Fed – Recent Developments in Monetary Policy Implementation

by Sabrina I. Pacifici on December 2, 2013

Simon Potter, Executive Vice President, Remarks before the Money Marketeers of New York University, New York City, As prepared for delivery, December 2, 2013.

“My remarks this evening will focus on the role played by the New York Fed’s Trading Desk (the Desk) in the implementation of monetary policy and how our operational tools have evolved in recent years.  I’ll focus in particular on the potential use of overnight, fixed-rate reverse repurchase agreements, also known as reverse repos, which we began testing in September.  We’ve been testing this instrument to support the Federal Open Market Committee’s (FOMC) longer-run planning for the implementation of monetary policy, and its development shouldn’t be interpreted as a signal of the FOMC’s intentions for monetary policy or the path or timing of any future change in the level of policy accommodation.  As always, the views expressed here are my own and do not necessarily reflect those of the New York Fed or the Federal Reserve System…An important point to observe is that the rate for which the FOMC sets a target, the overnight federal funds rate, represents an unsecured lending rate between banks.  But the Desk conducted its operations with its primary dealer counterparties—government securities dealers that have an established trading relationship with the New York Fed—in the secured financing market for general collateral repurchase agreements, or GC repos.  This market serves as a hub in which broker-dealers and other market participants finance their inventories of securities, frequently borrowing from cash-rich investors, such as money market funds.  These financing arrangements are structured as repos, in which the security is technically sold with an agreement to repurchase at an agreed-upon later date.  The transaction can be thought of in most respects as economically similar to a collateralized loan.  The growth of the GC repo market in recent decades has reflected the greater issuance of marketable securities in the United States, and the repo market and the broker-dealers, through their intermediation, support the healthy functioning of the markets for such securities.”

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