FOMC Excerpt: New Tools For Controlling Interest Rates >

WASHINGTON (MNI) - The following is an excerpt from the Federal Open 

Market Committee minutes of the December 18 - 19 meeting, published 

Wednesday:

     In discussing the transition to a long-run operating regime, 

participants commented on the advantages and disadvantages of allowing 

reserves to decline to a level that could put noticeable upward pressure 

on the federal funds rate, at least for a time. Reducing reserves close 

to the lowest level that still corresponded to the flat portion of the 

reserve demand curve would be one approach consistent with the 

Committees previously stated intention, in the Policy Normalization 

Principles and Plans that it issued in 2014, to hold no more securities 

than necessary to implement monetary policy efficiently and 

effectively. However, reducing reserves to a point very close to the 

level at which the reserve demand curve begins to slope upward could 

lead to a significant increase in the volatility in short-term interest 

rates and require frequent sizable open market operations or new ceiling 

facilities to maintain effective interest rate control. These 

considerations suggested that it might be appropriate to instead provide 

a buffer of reserves sufficient to ensure that the Federal Reserve 

operates consistently on the flat portion of the reserve demand curve so 

as to promote the efficient and effective implementation of monetary 

policy. 

     Participants discussed options for maintaining control of interest 

rates should upward pressures on money market rates emerge during the 

transition to a regime with lower excess reserves. Several participants 

commented on options that rely on existing or currently used tools, such 

as further technical adjustments to the IOER rate to keep the federal 

funds rate within the target range or using the discount window, 

although such options were recognized to have limitations in some 

situations. Some participants commented on the possibility of slowing 

the pace of the decline in reserves in approaching the longerrun level 

of reserves. Standard temporary open market operations could be used for 

this purpose. In addition, participants discussed options such as ending 

portfolio redemptions with a relatively high level of reserves still in 

the system and then either maintaining that level of reserves or 

allowing growth in nonreserve liabilities to very gradually reduce 

reserves further. These approaches could allow markets and banks more 

time to adjust to lower reserve levels while maintaining effective 

control of interest rates. Several participants, however, expressed 

concern that a slowing of redemptions could be misinterpreted as a 

signal about the stance of monetary policy. Some participants expressed 

an interest in learning more about possible options for new ceiling 

tools to provide firmer control of the policy rate. 

     ** MNI Washington Bureau: (202)371-2121 ** 

[TOPICS: MMUFE$,M$U$$$,MT$$$$]