MNI POLICY: Fed's Harker: Larger Pool of Bank Reserves Needed

By Jean Yung

     WASHINGTON (MNI) - Repo trading disruptions show the Fed needs a larger

pool of reserves to ensure smooth functioning in money markets and effective

monetary policy, Philadelphia President Pat Harker said Wednesday. 

     "Fundamental shifts" have occurred in market functioning over the course of

the recovery, Harker said. Banks are "extremely reluctant" to borrow from the

discount window. Regulations may play a role and the Fed may need to expand its

toolkit for interest rate control, including creating a standing repo facility,

he said in remarks prepared for an Official Monetary and Financial Institutions

Forum. 

     "While September's turmoil offered perhaps too much excitement, it also

provided a good deal of information. It showed that we need a larger pool of

reserves than most of our estimates had initially indicated," Harker said. 

     "It showed that when reserves are scarce, even for as short a period as a

week or so, it can generate large spikes in money market rates." 

     The Fed remains committed to its ample reserves regime and its plan to

build back up reserves to early September levels. There were no liquidity

squeezes at year-end and the effective fed funds rate has been "virtually

constant" since October, Harker said. 

     The Fed is still analyzing design choices for a standing repo facility, he

added. 

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

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