By Michael S. Derby
The New York Fed is looking at expanding access to a facility used to influence short-term interest rates and implement monetary policy in a way that could bring smaller firms into the marketplace, an official at the bank said.
Lorie Logan, who manages the Federal Reserve Bank of New York's $7.7 trillion System Open Market Account holdings of securities and cash, on Thursday said the central bank is exploring doing business with a broader range of firms as it works to pursue the monetary policy goals laid out by Fed officials.
Ms. Logan was addressing how the Fed implements monetary policy by way of two key rates. For decades, the Fed primarily has used the market-determined federal-funds rate to influence the economy's momentum to achieve the central bank's maximum employment and stable inflation mandates. For some time, the high end of the fed-funds rate range has been bounded by a rate the Fed pays deposit-taking banks to park cash on the Fed's books. Another rate, called the reverse repo rate, sets the low end in transactions with eligible investment funds and other financial firms.
Right now, the so-called interest rate on excess reserves stands at 0.1% and the reverse repo rate is zero.
Ms. Logan said that market developments have created softness in some short-term interest rates, which in turn can pull the fed-funds rate toward the lower end of the Fed's current 0% to 0.25% target range. She said the central bank may have to tinker with the settings of its tool kit to ensure the control it wants over the fed-funds rate.
Given this landscape, the overnight repo rate "is likely to become an increasingly important element of our operating framework."
With the reverse repo facility, "expanding counterparty eligibility can reduce barriers to entry and foster inclusivity by potentially making our operations accessible to smaller firms," Ms. Logan said. She added, "A more vibrant and diverse marketplace could, in turn, strengthen the effectiveness of monetary policy implementation tools."
"Relaxing eligibility criteria helps bring a diverse set of firms by size, business model, and ownership into our counterparty base, and we look forward to leveraging these new business relationships to also broaden our market intelligence efforts," the Fed staffer said.
Ms. Logan also said the Fed "may consider adjusting administered rates if undue downward pressure on overnight rates emerges." The central bank has tweaked those rates several times in recent years.
Write to Michael S. Derby at firstname.lastname@example.org
(END) Dow Jones Newswires
April 08, 2021 17:10 ET (21:10 GMT)Copyright (c) 2021 Dow Jones & Company, Inc.