MW: Fed officials still refining how to raise rates
WASHINGTON (MarketWatch)—Federal Reserve officials at their latest policy meeting were still refining how to raise interest rates when the times comes, according to minutes released Wednesday.
Raising rates will be different this time, given the Fed’s large balance sheet. The Fed used to control the amount of reserves in the banking system, but now banks are awash with more than $2 trillion in excess reserves.
To raise rates, the Fed is going to raise the interest rate it pays banks to park their reserves at the Fed.
To make sure the rate doesn't leak, the Fed has been testing a reverse repurchase agreement program.
Reverse repos (“repo” is Wall Street-speak for repurchase) are, at in essence, short-term loans provided to the central bank by institutional investors like money-market funds. They are expected to set a floor under short-term interest rates.
Fed officials had capped the program at $300 billion.
But at the March meeting, after experts said it had to be larger to work, Fed officials said they would increase its size during the initial rate hikes but only for “a short period,” according to the minutes.
