Federal Reserve officials are considering a new program that would allow banks to exchange Treasurys for reserves.
contributed to a market meltdown that lasted through the fourth quarter. Since October 2017, the Fed has been allowing a set level of proceeds from Treasurys and mortgage-backed securities holdings to roll off each month, resulting in a reduction of just shy of $500 billion.end the balance sheet roll-off in September
The Fed ideally would like to see a lower reserve level, with the New York Fed putting the desired number from banks around $784 billion. The level of bank reserves at the Fed peaked at nearly $2.8 trillion in mid-2014 and is currently $1.55 trillion, or some $1.41 trillion above the required amount. Reserves and the bond assets are on opposite sides of the balance sheet and thus tend to move in sync.
Under three previous QE stages — another called "Operation Twist" was balance-sheet neutral — the Fed credited itself with funds that it then used to acquire Treasurys and mortgage-backed securities. The total of the operations was about $3.8 trillion and is widely felt to have stemmed liquidity issues, held interest rates low and juiced up the prices of risky assets like stocks and corporate bonds.
Supporters of the reverse repo facility said it would correct some of the mistakes of the past and stand as a bulwark against market disruptions like what happened during the financial crisis in 2008. How quickly the Fed might take up the idea is uncertain. Ireland said he expects the central bank likely wouldn't act until it became necessary, for fear of "unintended consequences."
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