Wednesday, January 29, 2014

Cardiff Garcia — A new call for rev-repo to become the new policy rate

To those who have been watching the developments in the Fed’s fixed-rate full-allotment repo facility*, it won’t come as a bracing shock that the facility’s interest rate might eventually be synced with the interest rate paid on reserves and supplant the federal funds rate as the Fed’s new policy rate.

A short paper by Joseph Gagnon and Brian Sack arguing in favour of such a framework has been eagerly awaited and is now live (hat tip Real Time Economics). Sack’s authorship is especially notable given that he was head of the New York Fed’s markets desk until June 2012, when he was replaced by Simon Potter.
The Financial Times — FT Alphaville
A new call for rev-repo to become the new policy rate
Cardiff Garcia

1 comment:

Ryan Harris said...

They don't have a mechanism to lower rates in the repo market, only raise them. The fed can borrow from the private sector to raise rates, but because the fed can only lend to banks, it can't lower rates.
This is more neo-liberal nonsense, trying to get the big boys access to the Fed to avoid the banking system regulatory scheme. I'm not a huge fan of unregulated investment brokerages, reits, General Electric, AT&T... General Motors those big companies who use repo markets and commercial paper funding for daily operations to have access to borrow directly from the Fed, ever. It's fine if they lend to the fed, but not borrow, except when markets malfunction horribly. The banks are supposed to serve this purpose. If they have been regulated into uselessness or financial analysis is flawed or government isn't regulating macro-policy to make financial analysis useful so that the Fed rate is no longer transmitted to private markets, then regulations and governance need to be examined as to why banks don't function as sources of credit. Something is amiss.