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MONETARY POLICIES

Federal Overnight Reserve Repurchase Repo

and Fed Funds Implications for 2015

federal overnight reserve, repurchase repo, Fed, funds, implications, 2015, fx trader, forex, Monetary policy, interest, bank, deposit

When the Federal Reserve began to pay interest against bank deposits was first granted in 2006 when the United States Congress passed the Financial Services Regulatory Relief Act of 2006. The legislative start date was 2011 but the mortgage collapse caused a deep conundrum in housing and other markets in 2008 so Congress then passed the Emergency Economic Stabilization Act of 2008 to begin immediately to pay interest on required reserves for the third time in 50 years. Prior to 2008, the Fed paid interest on required reserves for two months total in 2001 at the time of 9/11 and the beginning of the 2007 recession.

Two purposes existed to pay interest on required deposited reserves: to maintain the Fed Effective Funds rate close to target and in range and prevent Fed Funds from trading at 0, or worse, trade in negative territory as is the case in regards to Eonia in Europe despite ECB’s ability to pay required interest reserves since 1999. The other example is Sweden’s Repo Rate, which currently trades at 0 while the BOE was granted legislative capability to pay interest on required reserves since 2009 to offer worldwide context.

The second aspect to the 2008 legislation is the Fed’s ability to pay and adjust interest on excess reserves but this new Fed “tool” was little known and employed, yet it would become an interesting foresight as excess reserves and the velocity of the Fed’s balance sheet in relation to the historic monetary base sky-rocked from 2008 / 2009 onwards when various Tarp facilities were introduced to provide liquidity to the banking system. Required Reserves for example averaged about $100 billion during the first six months of 2012 while excess reserves averaged $1.5 trillion.

Excess Reserves of Depository Institutions federal overnight reserve, repurchase repo, Fed, funds, implications, 2015, fx trader, forex, Monetary policy, inter
Chart 1 - Excess Reserves of Depository Institutions        Source: Federal Reserve Bank of St. Louis

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