MNI INTERVIEW: Fed's Rosengren Eyes Options On Reserve Squeeze

By Evan Ryser

     WASHINGTON (MNI) - Boston Fed President Eric Rosengren sees a standing repo

facility among options to address squeezes in repo markets as the Fed learns

more about the appropriate level of reserves for overnight funding markets.

     A standing repo facility, which would allow banks to immediately convert

Treasury bond holdings into reserves and were mentioned in the June meeting's

minutes, "will be in the mix of things" as the Fed seeks to ensure sufficient

liquidity to keep control of the Fed Funds rate, Rosengren told MNI over the

weekend in an interview in which he said he still saw H2 growth at around

potential.

     "We have to get more details around how [a standing repo facility] would

actually operate but I think that in conjunction with thinking about what the

appropriate supply of reserves would be those things are interrelated," he said

on the sidelines of a Boston Fed conference.

     Another way of providing liquidity would be purchases of short-maturity

government debt, Rosengren said, adding that these would not constitute

quantitative easing, but would be "a technical adjustment reflecting the fact

that reserves have become a little bit too tight."

     --NOT QE

     "The goal would not necessarily be to change the financial conditions, but

actually just to reflect the tightness in the reserve market, " he said, "This

is a technical change. This isn't a monetary policy change, to the extent that

we do it."

     Rosengren attributed the repo spike to factors including tax payments and

commercial banks' reserve and liquidity requirements, as well as to the

reduction of the Fed's balance sheet.

     "Some of the banks have chosen to hold fairly substantial excess reserves

to meet what they think their liquidity needs are. I think we've learned that

they may be less price sensitive in their holdings and liquidity requirements

than we might've thought," he said.

     "We've also been shrinking our balance sheet and reducing the amount of

reserves over time, particularly the amount of excess reserves. So that has

contributed to the fact that we don't know exactly at what point those reserves

start becoming a little too scarce."

     The New York Fed stepped into the repo market after overnight rates spiked

in mid-September, and on Friday it announced it would inject $75 billion every

day through Nov. 4 and conduct term-repo operations until early November. At the

Fed's September meeting, Chair Jerome Powell said the FOMC would consider the

repo market at its Oct. 29-30 meeting, and that possible remedies included asset

purchases.

     "I can't say anything until we've made a decision," Rosengren said, "But

you could do more on the front end. You could do more through the flow. Part of

it is what your taste and preferences are for, you can address it with term

[repos] and overnight [repos] too. So, I think there are plenty of ways for us

to provide the amount of reserves that are needed, and we just have to get to a

decision about what exactly that path will be."

     Rosengren dissented against the last FOMC meeting's 25-basis-point cut,

preferring to maintain the Fed Funds target range between 2% and 2.25%, due to

concerns over risky assets and excessive leverage.

     --H2 GROWTH "AROUND POTENTIAL"

     While the economy is "a little weaker than I was anticipating," Rosengren

said "I'm still expecting growth in the second half of the year to be around

potential. My estimate would be 1.7."

     Tariffs and a global slowdown have hit manufacturing and exports, he said,

but the bigger question is what will happen to consumption.

     "So far I think consumption has held up reasonably well," he said. "There

are enough negative headlines that if consumers start becoming more concerned,

that would be something that I'm going to be watching quite closely."

     "Inflation's a little lower than our target at 1.8 on the core PCE," he

said, but it has been approaching 2%. With relatively accommodative monetary

policy, and a labor market that's "pretty tight," we will get up to our 2%

inflation rate, or maybe a little bit above over time."

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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