Tracking The World Economy... - 19/08/2010

The US Fed Getting Ready To Drain Liquidity, If Needed The Federal Reserve Bank of New York expanded its list of counterparties used for reverse repurchase agreements by adding money market funds managed by 14 firms including Fidelity Investments and Goldman Sachs Group Inc. In March, the New York Fed said that it would use the additional firms to enhance the capacity of such operations to drain reserves beyond what could likely be conducted through the use of the central bank’s 18 primary dealers given the sheer size of its balance sheet. The Fed is concerned that the 18 primary dealers, who are currently working to shore up their own balance sheets from the effects of the worst financial crisis since the Great Depression, may not have enough capacity to handle the transactions to remove or neutralise the Fed’s balance sheet after assets reached a record US$2.35 trn on 19 May. Reverse repurchase agreements are one of the tools being prepared for an eventual withdrawal of monetary stimulus. The Fed said before that it may use reverse repos, pay interest on excess reserves and sell securities to investors to withdraw or neutralise cash in the banking system. On 11 August, the Fed drained US$540m in temporary reserves when it arranged three overnight tri-party reverse repurchase agreements using Treasury, agency and mortgagebacked debt as collateral.

Tracking The World Economy... - 19/08/2010