WASHINGTON – The Federal Reserve has begun detailing how it plans to ease the U.S. economy out of an era of loose monetary policy, appearing near agreement on a three-pronged strategy to manage interest rates in the future, according to minutes of the last Fed policy meeting.
The minutes from the June 17-18 meeting indicate the Fed envisions using its overnight repurchase agreements in tandem with the interest it pays banks on excess reserves to set a ceiling and floor for its target interest rate.
Though no decisions have been announced, the discussion has become detailed enough for Fed officials to contemplate the proper spread between the two — mentioned in the minutes as 20 basis points.
The Fed’s massive stimulus has flooded financial markets with cash and stifled daily participation in the traditional Fed funds market. The new reverse repo facility, which remains in test phase but is expected to be formally adopted, is designed to control cash held by money market funds and mortgage agencies that can’t deposit money with the Fed, not just banks.
Raising or lowering the interest on excess reserves can encourage or discourage banks from holding money at the Fed.