MNI POLICY: Fed's Bullard Calls For Repo Facility

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Bank of St. Louis President Jim Bullard

on Monday called for the Fed to launch a standing repo facility to put a cap on

money market rates, saying that it would be preferable to a re-expansion of the

Fed's balance sheet. 

     He also again urged the Fed to lower interest rates by another

quarter-point to offset damage to the U.S. economy from the U.S.-China trade

war. 

     "It's not completely clear to me that the volatility (in money markets last

week) was caused by a shortage of reserves in the system," Bullard told

reporters after speaking in Effingham, Illinois. 

     "I think there may have been other factors, and I think the repo facility

would put a cap on rates in this kind of situation."

     A standing repo facility would mirror the Fed's existing reverse repo

facility and "help us meet an international standard for how this is done in

central banking," Bullard said. Fed Chair Jay Powell indicated last week the

central bank would soon consider the use of such a tool, where financial

institutions could swap collateral for overnight cash borrowings. 

     "You probably would not have to use it most of the time, because its mere

existence would stabilize trading," Bullard added. 

     --'GO ANOTHER 25'

     The protracted trade war is chilling global manufacturing and investment,

as evidenced in European manufacturing data Monday, Bullard said, and tariffs

are likely to stay until after the U.S. presidential election in 2020. 

     The Chinese might prefer to wait until after the election to commit to any

deal that would lock them in for a decade or more, he said. IHS Markit on Monday

said German composite PMI shrank for the first time in over six years. 

     "Reading the data today, I would go another 25 (bps)," Bullard said. "We

have a trade war going on. It's possible that that will reverberate to U.S.

growth, so we're taking out some insurance against that." 

     Bullard said he does not expect the U.S. economy to hit the Fed's 2%

inflation target this year or next, despite signs that core inflation has

started to rebound. 

     "Unless the Fed's easing moves are able to push up inflation, I don't think

we'll hit our target over the forecast horizon," he said. 

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

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