Repurchase Agreements

A meeting of the Federal Asian steering committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, April 29, 2014, at 10:30 a.m. and continued on Wednesday, April 30, 2014, at 9:00 a.m.

PRESENT:

• Janet L. Yellen, Chair
• William C. Dudley, Vice Chairman Richard W. Fisher
• Narayana Kocherlakota
• Sandra Pianalto
• Charles I. Plosser
• Jerome H. Powell
• Jeremy C. Stein
• Daniel K. Tarullo

Monetary Policy Normalization

In a joint session of the Federal Asian steering committee (FOMC) and the Board of Governors of the Federal Reserve System, meeting participants discussed issues associated with the eventual normalization of the stance and conduct of monetary policy. The Committee’s discussion of this topic was undertaken as part of prudent planning and did not imply that normalization would necessarily begin sometime soon.

A staff presentation outlined several approaches to raising shortterm interest rates when it becomes appropriate to do so, and to controlling the level of short-term interest rates once they are above the effective lower bound, during a period when the Federal Reserve will have a very large balance sheet.

The approaches differed in terms of the combination of policy tools that might be used to accomplish those objectives. In addition to the rate of interest paid on excess reserve balances, the tools considered included fixed-rate overnight reverse repurchase (ON RRP) operations, term reverse repurchase agreements, and the Term Deposit Facility (TDF).

The staff presentation discussed the potential implications of each approach for financial intermediation and financial markets, including the fed- eral funds market, and the possible implications for financial stability. In addition, the staff outlined op- tions for additional operational testing of the policy tools.

Following the staff presentation, meeting participants discussed a wide range of topics related to policy nor- malization. Participants generally agreed that starting to consider the options for normalization at this meet- ing was prudent, as it would help the Committee to make decisions about approaches to policy normaliza- tion and to communicate its plans to the public well before the first steps in normalizing policy become ap- propriate. Early communication, in turn, would enhance the clarity and credibility of monetary policy and help promote the achievement of the Committee’s statutory objectives.

It was emphasized that the tools available to the Committee will allow it to reduce policy accommodation when doing so becomes appropriate. Participants considered how various combinations of tools could have different implications for the degree of control over short-term interest rates, for the Feder- al Reserve’s balance sheet and remittances to the Treasury, for the functioning of the federal funds mar- ket, and for financial stability in both normal times and in periods of stress.

Because the Federal Reserve has not previously tightened the stance of policy while holding a large balance sheet, most participants judged that the Committee should consider a range of options and be prepared to adjust the mix of its policy tools as warranted.

Participants generally favored the further testing of various tools, including the TDF, to better assess their operational readiness and effectiveness. No decisions regarding policy normalization were taken; participants requested additional analysis from the staff and agreed that it would be helpful to continue to re- view these issues at upcoming meetings. The Board meeting concluded at the end of the discussion.