Fed to test exit strategy

November 30, 2009

From the Fed: Statement regarding reverse repurchase agreements

…in the coming weeks, as an extension of this work, the Federal Reserve Bank of New York plans to conduct a series of small-scale, real-value transactions with primary dealers. Like the earlier rounds of testing, this work is a matter of prudent advance planning by the Federal Reserve. It does not represent any change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future.

These forthcoming operations are being conducted to ensure operational readiness at the Federal Reserve, the triparty repo clearing banks, and the primary dealers. The operations have been designed to have no material impact on the availability of reserves or on market rates. Specifically, the aggregate amount of outstanding transactions will be very small relative to the level of excess reserves, and the transactions will be conducted at current market rates.

Bernanke has said that the Fed has the power to mop up excess reserves. Reverse repo transactions, whereby the Fed sells securities in exchange for cash, are one of the arrows in his quiver. The question is whether he’ll actually use it. The rise in gold’s price is a bet he never will, not in any meaningful way. He can’t. He’s trapped: If he goes hawkish, he’ll hammer the economy.

But if he doesn’t, he’ll just reflate a larger credit bubble.

2 comments

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Yup. theres this thing about spending more than you take in… Once you get used to it, its hard to cut back. And if you have been indoctrinated…oops! “educated” to believe that borrowing is income, and debt is wealth – well, this is the logical place you end up.

Posted by fresno dan | Report as abusive

[...] The Fed is testing the machinery to reverse the growth of its portfolio of securities.  (DealBook, Rolfe Winkler) [...]

I have the perfect solution. Rather than use quantitative easing to buy long bonds, why doesn’t the Fed using quantitative easing to buy gold?This is would have the fun effect of causing the price of gold to skyrocket, which would be a big boost to the value of our own supply at Fort Knox.Better still, the Fed should buy a ton of commodities that can be had for a better price. Buy those and put them in a warehouse somewhere.The fed is pussyfooting around its desire for inflation. Please! Robert Mugabe could tell him inflation is not rocket science.

Posted by Dan Hess | Report as abusive

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