Author: Kenneth D. Garbade
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The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
The growing role of nonbank financial institutions, or NBFIs, in U.S. financial markets is a transformational trend with implications for monetary policy and financial stability.
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Staff Reports
Repurchase Agreements as an Instrument of
Monetary Policy at the Time of the Accord
June 2016 Number 780
JEL classification: E5, G2, N2
Following the Treasury–Federal Reserve Accord of March 3, 1951, the Federal Open
Market Committee (FOMC) focused on free reserves—the difference between excess reserves (reserve
deposits in excess of reserve requirements) and borrowed reserves—as the touchstone of U.S.
monetary policy. However, managing free reserves was problematic because highly variable and
not readily predictable autonomous factors, including float, Treasury balances at Federal Reserve
Banks, and currency in the hands of the public, induced comparable volatility and
unpredictability in reserve deposits and hence in free reserves. Managing free reserves effectively
required policy instruments that could inject and drain large quantities of reserves quickly at low
transaction costs.
This paper surveys the two leading policy instruments for reserves management: 1) open
market purchases and sales of Treasury bills, and 2) repurchase agreements. Outright transactions
in bills were specifically authorized by statute and used in unexceptional ways for managing
reserves over relatively long periods, but they had significant drawbacks for short-term “in and
out” operations when additional reserves were needed for only a few days. Repos, however, while
not specifically authorized by statute, were ideally suited for in-and-out operations. The
acceptance of repurchase agreements as an instrument of monetary policy, even in the face of
active resistance by some FOMC members, illustrates how utility can sometimes trump concerns about
statutory authority, equity, and need.
49 pages / 342 kbTools
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