Managing the Fed’s Liftoff and Transmission of Monetary Policy

September 23, 2015

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Format: Chicago

Manmohan Singh. Managing the Fed’s Liftoff and Transmission of Monetary Policy, (USA: International Monetary Fund, 2015) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

In recent years, many money and repo rates in the United States have been between zero and 25 basis points. As Fed’s liftoff approaches, the question of the level of these rates (and the markets that determine them) becomes increasingly important. The paper discusses (i) whether the Fed can control short–term rates as it starts to tighten; and (ii) what are the advantages and disadvantages of using asset sales versus a large reverse repo program (RRP). A large RRP by the Fed will deprive the financial system of the money pool (i.e., GSEs and money market funds) as the Fed will directly absorb the money on to its balance sheet. This will rust the financial plumbing that connects the money pool to collateral suppliers. Some asset sales may be preferred to a large RRP as this will result in a market-determined repo rate and will allow the Fed to reach its monetary policy liftoff objectives with minimal footprint on market plumbing. We also discuss cost of issuing short tenor T-bills relative to a large RRP in a rising rate environment.

Subject: Banking, Central bank policy rate, Collateral, Financial institutions, Financial services, Financial statements, Public financial management (PFM), Repo rates, Securities

Keywords: Asset, Bank, Central bank policy rate, Collateral, Fed assets, Fed balance sheet, Fed Funds Rate (FF), FF rate, FF target rate move, Financial statements, General Collateral (GC) rate, Global, Nonbank, Nonbank nexus, Nonbank plumbing, Rate, Repo rates, Reverse repo program (RRP), Securities, WP

Publication Details

Pages:

20
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/202
Stock No:

WPIEA2015202
ISBN:

9781513523811
ISSN:

1018-5941

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