Committee for a Responsible Federal Budget

Fed Begins Making Reverse Repurchase Agreements

Mar 10, 2010

This week, the New York Federal Reserve announced the beginning of a new Reverse Repurchase Agreement Program to reduce some of the liquidity in financial markets. Under the program, the Fed will sell securities from it's portfolio -- but with an obligation to repurchase them at a later date. This is an additional sign of tightening from the Fed, in light of last month's increase in the discount rate from 0.5 to 0.75 percent.

The New York Fed originally announced this program back in October in an operating policy statement, stating that they had been working internally on the operational details of repurchases and reverse repurchases to make it a viable option if the FOMC decided such a program should be used. In the statement, the Fed also announced that reverse repos are nothing new and have even "been in the Federal Reserve's toolkit for years, and the Federal Reserve has conducted them both as recently as December 2008."

The New York Fed said that the reverse repurchase agreements will initally focus on firms that provide the largest amounts of short-term funding -- namely, primary dealers and domestic money market mutual funds -- but intends to eventually broaden the pool to more participants.

Even though this can be interpreted as a method of tightening, the Fed's statement yesterday maintained that the announcement of this program should not affect expectations on any other monetary policy moves. The program will indeed reduce some liquidity in markets, but is unlikely to have any significant impact.

CRFB has incorporated this program into the list of Fed programs, created to address the economic crisis, on Stimulus.org.