MNI TRANSCRIPT: Powell on Repo Markets

     WASHINGTON (MNI) - The following is the portion of a transcript from

Federal Reserve Chairman Jerome Powell's press conference after the FOMC meeting

Wednesday:

     A: I'm going to take a step back and I will get to your specific questions

on the year end and on T-bills. I want to start by stressing, these are very

important operational matters, but are not likely to have any macroeconomic

implications. We decided in January to remain at a ample reserves regime. That

means we will be setting the federal funds rate, the range for the rate through

our administered rates and not through active management of the level of

reserves. We are committed to robustly implementing that framework, as you can

see by our actions. The purpose of all this, let's remember, is to assure our

monetary policy decisions will be transmitted to the federal funds rate which in

turn affects other short term rates. We have the tools to accomplish that. We

will use them. The purpose of this is not to eliminate all volatility

particularly in the repo market. Taking you back, as you know, we had very

gradually allowed the balance sheet to shrink. We slowed that gradual pace by

half in March and we ended it in July. Meanwhile we surveyed all of the banks

and particularly the large banks who hold a lot of reserves and said what is

your lowest comfortable level of reserves. We got those numbers, added them up,

added a buffer and it came out at a level that was well below where we were in

September. Yet, we saw in September that reserves the markets acted as though

reserves had become scarce. Liquidity which existed didn't flow into the repo

market and that had effects on the federal funds rate. The question is, why did

that happen? We have been carefully looking at the reasons why that might have

happened. There are payments issues, there have been a number of supervisory and

regulatory issues raised. We are looking carefully at those. We are open to

ideas for modifying supervisory and regulatory practice, in ways that don't

undermine safety and soundness and a number of ideas are under examination. To

go through it in time, we started off on September 17 with overnight operations,

by October 11 we had created and put into effect a plan, that plan is in effect.

Is it working, I think for the last couple of months, repo markets have been

functioning well, short term rates are stable. Markets are functioning. You

asked about year end. Temporary upward pressures on short term money market

rates are not unusual around year end. Both our repo operations and treasury

bill purchases are intended to mitigate the risks that such pressures pose to

our control of the federal funds rate. We think that the pressures appear

manageable, and we stand ready to adjust the details of our operations as

necessary to keep the federal funds rate in the target range. Our strategy has

been essentially the key to our strategy is to supply reserves in the near term

through both overnight and term repo, and at the same time we are raising the

underlying level of reserves through bill purchases. I'll take that now, we have

said bill purchases, we have said we were willing to adapt our strategy also. We

are not at this place but if it becomes appropriate for us to purchase other

short term coupons securities, we would be prepared to do that, if the need

arises. But we are not in that place. It very much looks like the bills, bill

purchases are going well just according to expectations. We are in very regular

contact with market participants all the time. We will be providing, we will be

continuing that, and we are prepared to adjust our tactics. We are focused on

year end as well, prepared to adjust our operations as appropriate.

     Q: Possibility of a standing repo facility?

     A: On the standing repo facility, we have had a couple of meetings where we

have discussed that. I think the standing repo facility is something that will

take time to evaluate and create the parameters of and put into place. At the

moment we are focused on year end. I should mention that after year end, the

sense of it is that as the underlying level of reserves moves up because of bill

purchases, as that happens, there will come a time when it will be appropriate

for overnight and term repo to gradually decline. We don't know, we can't know

today what the timing of that will be. But that is the way we see it going over

time

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

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