Fed to test exit strategy
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.