MNI POLICY: Fed's Williams: To Examine Overall Reserves Level

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve intends to reevaluate the

appropriate level of bank reserves on its balance sheet in the wake of an acute

funding squeeze in the repo market last week, New York Fed President John

Williams said Monday. 

     The New York Fed was forced to inject liquidity into overnight cash

borrowing markets last week and anticipates needing to do so again at the end of

the quarter "to keep the federal funds rate within the target range," Williams

said in remarks prepared for a conference at his bank. 

     The episode highlighted the Fed's critical role in supplying liquidity, he

said. "It is equally important that we examine these recent market dynamics and

their implications for the liquidity needs in relation to the overall amount of

reserves held at the Federal Reserve," he added. 

     Some analysts and traders blamed the Fed's shrinking reserves pool as

exacerbating the liquidity squeeze. 

     Williams defended the NY Fed's actions last week as having "the desired

effect of reducing strains in markets, narrowing the dispersion of rates, and

lowering secured and unsecured rates to more normal levels relative to other

benchmarks." 

     The bank had expected the combination of quarterly corporate tax payments

and settlement of Treasury auctions to put upward pressure on funding rates,

however, "the size of the reaction in repo rates, the spillover to unsecured

markets such as federal funds, and the emergence of strains in market

functioning were outside of recent experience," he said. 

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

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