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Managing the Fed’s Liftoff and Transmission of Monetary Policy

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  • Mr. Manmohan Singh

Abstract

In recent years, many money and repo rates in the United States have been between zero and 25 basis points. As Fed’s liftoff approaches, the question of the level of these rates (and the markets that determine them) becomes increasingly important. The paper discusses (i) whether the Fed can control short–term rates as it starts to tighten; and (ii) what are the advantages and disadvantages of using asset sales versus a large reverse repo program (RRP). A large RRP by the Fed will deprive the financial system of the money pool (i.e., GSEs and money market funds) as the Fed will directly absorb the money on to its balance sheet. This will rust the financial plumbing that connects the money pool to collateral suppliers. Some asset sales may be preferred to a large RRP as this will result in a market-determined repo rate and will allow the Fed to reach its monetary policy liftoff objectives with minimal footprint on market plumbing. We also discuss cost of issuing short tenor T-bills relative to a large RRP in a rising rate environment.

Suggested Citation

  • Mr. Manmohan Singh, 2015. "Managing the Fed’s Liftoff and Transmission of Monetary Policy," IMF Working Papers 2015/202, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2015/202
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    References listed on IDEAS

    as
    1. Mr. Manmohan Singh & Mr. Peter Stella, 2012. "Money and Collateral," IMF Working Papers 2012/095, International Monetary Fund.
    2. Ronald W.Anderson & Karin Jõeveer, 2014. "The Economics of Collateral," FMG Discussion Papers dp732, Financial Markets Group.
    3. Joseph E. Gagnon & Brian Sack, 2014. "Monetary Policy with Abundant Liquidity: A New Operating Framework for the Fed," Policy Briefs PB14-4, Peterson Institute for International Economics.
    4. Michelle L. Barnes, 2014. "Let's talk about it: what policy tools should the Fed \\"normally\\" use?," Current Policy Perspectives 14-12, Federal Reserve Bank of Boston.
    5. Josh Frost & Lorie Logan & Antoine Martin & Patrick E. McCabe & Fabio M. Natalucci & Julie Remache, 2015. "Overnight RRP operations as a monetary policy tool: some design considerations," Staff Reports 712, Federal Reserve Bank of New York.
    6. Mr. Manmohan Singh, 2011. "Velocity of Pledged Collateral: Analysis and Implications," IMF Working Papers 2011/256, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

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