Fed Readies New Rate Tool

Today’s minutes of the July 30-31 FOMC meeting note that the Fed’s staff is working on a new monetary policy tool. It’s actually a variation of the Fed’s traditional overnight reverse repurchase agreement facility. However, instead of the rate being determined by the market, it will be fixed by the Fed. This will allow the Fed to drain reserves from the banking system at a fixed rate:

In support of the Committee’s longer-run planning for improvements in the implementation of monetary policy, the Desk report also included a briefing on the potential for establishing a fixed-rate, full-allotment overnight reverse repurchase agreement facility as an additional tool for managing money market interest rates. The presentation suggested that such a facility would allow the Committee to offer an overnight, risk-free instrument directly to a relatively wide range of market participants, perhaps complementing the payment of interest on excess reserves held by banks and thereby improving the Committee’s ability to keep short-term market rates at levels that it deems appropriate to achieve its macroeconomic objectives.

This is another indication that the Fed is setting the stage for the eventual tightening of monetary policy.