FOMC Minutes Excerpt: Discussion On Money Market Developments>

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

Market Committee minutes describing committee's policy action, 

published Wednesday for the September meeting: 

Participants' Discussion of Recent Money Market Developments 

     The manager pro tem provided a summary of the most recent 

developments in money markets.  Open market operations conducted on the 

previous day had helped to ease strains in money markets, but the EFFR 

had nonetheless printed 5 basis points above the top of the target 

range.  With significant pressures still evident in repo markets and the 

federal funds market, and in accordance with the FOMC's directive to 

maintain the federal funds rate within the target range, the Desk 

conducted another repo operation on the morning of the second day of the 

meeting.  The staff presented a proposal to lower the IOER rate and the 

overnight reverse repurchase agreement rate by 5 basis points, relative 

to the target range for the federal funds rate, in order to foster 

trading of federal funds within the target range.  

     Participants agreed that developments in money mar-kets over recent 

days implied that the Committee should soon discuss the appropriate 

level of reserve balances sufficient to support efficient and effective 

implementation of monetary policy in the context of the ample-reserves 

regime that the Committee had chosen.  A few participants noted the 

possibility of resuming trend growth of the balance sheet to help 

stabilize the level of reserves in the banking system.  Participants 

agreed that any Committee decision re-garding the trend pace of balance 

sheet expansion necessary to maintain a level of reserve balances 

ap-propriate to facilitate policy implementation should be clearly 

distinguished from past large-scale asset pur-chase programs that were 

aimed at altering the size and composition of the Federal Reserve's 

asset hold-ings in order to provide monetary policy accommo-dation and 

ease overall financial conditions.  Several participants suggested that 

such a discussion could benefit from also considering the merits of 

introduc-ing a standing repurchase agreement facility as part of the 

framework for implementing monetary policy. 

Developments in Financial Markets and Open Market Operations 

     The manager pro tem turned next to a discussion of money market 

conditions.  Money markets were sta-ble over most of the period, and the 

reduction in the interest on excess reserves (IOER) rate following the 

July FOMC meeting fully passed through to money market rates.  However, 

money markets became high-ly volatile just before the September meeting, 

appar-ently spurred partly by large corporate tax payments and Treasury 

settlements, and remained so through the time of the meeting.  In an 

environment of greater perceived uncertainty about potential outflows 

related to the corporate tax payment date, typical lenders in money 

markets were less willing to accommodate in-creased dealer demand for 

funding.  Moreover, some banks maintained reserve levels significantly 

above those reported in the Senior Financial Officer Survey about their 

lowest comfortable level of reserves rather than lend in repo markets.  

Money market mutual funds reportedly also held back some liquidity in 

or-der to cushion against potential outflows.  Rates on overnight 

Treasury repurchase agreements rose to over 5 percent on September 16 

and above 8 percent on September 17. 

     Highly elevated repo rates passed through to rates in unsecured 

markets.  Federal Home Loan Banks re-portedly scaled back their lending 

in the federal funds market in order to maintain some liquidity in 

anticipa-tion of higher demand for advances from their members and to 

shift more of their overnight fund-ing into repo.  In this environment, 

the effective fed-eral funds rate (EFFR) rose to the top of the target 

range on September 16.  The following morning, in accordance with the 

FOMC's directive to the Desk to foster conditions to maintain the EFFR 

in the target range, the Desk conducted overnight repurchase op-erations 

for up to $75 billion.  After the operation, rates in secured and 

unsecured markets declined sharply.  Rates in secured markets were 

trading around 2.5 percent after the operation.  Market partic-ipants 

reportedly expected that additional temporary open market operations 

would be necessary both over subsequent days and around the end of the 

quarter.  Many also reportedly expected another 5 ba-sis point technical 

adjustment of the IOER rate.  

--MNI Washington Bureau; tel: +1 202-371-2121; email: 

jean.yung@marketnews.com 

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