Fed Chair Janet Yellen Speaks At The International Monetary Fund
Andrew Harrer/Bloomberg via Getty Images Federal Reserve Chair Janet Yellen
By Howard Schneider, Michael Flaherty and Jonathan Spicer

WASHINGTON -- The Federal Reserve has begun detailing how it plans to ease the U.S. economy out of an era of loose monetary policy, indicating it will end its asset purchases in October and appearing near agreement on a plan 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 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 minutes showed the Fed participants "generally agreed" that its monthly bond purchases would end in October, with a final reduction of $15 billion in the amount bought each month of U.S. Treasuries and mortgage-backed securities.

The alternative would have been to leave $5 billion a month in purchases intact until December, but "most participants viewed this as a technical issue with no substantive macroeconomic consequences."

There also was more detailed discussion about the central bank's current policy of reinvesting its $4.2 trillion in asset holdings as the securities mature.

Policymakers have debated how to reduce those holdings without disrupting financial markets. They are divided over whether reinvestment should stop before or after an initial decision to raise interest rates.

In addition there is now discussion that the reinvestment decision may not be an all-or-nothing choice, with the central bank possibly letting some maturities expire each month and reinvesting the proceeds of others in an effort to "smooth the decline in the balance sheet," according to the minutes.

The Fed's exit strategy is complicated by the fact that its massive stimulus programs have flooded financial markets with cash and stifled daily participation in the Fed funds market that is traditionally used to manage interest rates.

The new reverse repo facility and the interest on overnight reserves are meant to give the Fed new tools to influence rates once policymakers agree they should start to rise again.

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.


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bolten2

The stock market may drop temporarily but the sooner businesses start standing on their own feet the better.

July 10 2014 at 11:48 AM Report abuse rate up rate down Reply
ectullis

Stimulus. What Stimulus? OMG

July 10 2014 at 10:11 AM Report abuse rate up rate down Reply
scottee

we need to be a country of savers....not spenders and debtors and, worst of all, liars.

July 10 2014 at 8:13 AM Report abuse rate up rate down Reply
1 reply to scottee's comment
rostra

Correct, unfortunately, both Parties have lied to the citizens since day one, yet each Party, and their Pavlov followers believe its always the fault of the other Party. Oh well, when the low intellect fools finally awaken from their coma's, maybe they'll realize its a two Party problem, and start electing people who work for the people, not business, and not foreign powers.

July 10 2014 at 8:55 AM Report abuse rate up rate down Reply
1 reply to rostra's comment
true.liberal

Mouth-breathing goons don't give a rats arse about business or foreign powers any more than they give a rats arse about individual citizens.

Goons work for goons.

July 10 2014 at 9:40 AM Report abuse -1 rate up rate down
rgw

What stimulus? Oh, you mean the trillions of dollars thrown up in the air in the "hope" that some actual long-term economic growth might occur? Without any actual plan for secondary or tertiary sustainable benefits? And no "shovel ready" jobs? That "stimulus"?

July 10 2014 at 12:36 AM Report abuse +1 rate up rate down Reply
2 replies to rgw's comment
scottee

it didn't go up in the air, it went to bankers. that doesn't benefit anyone except the bankers...but WE have to pay it back.

July 10 2014 at 8:14 AM Report abuse rate up rate down Reply
2 replies to scottee's comment
rostra

Wrong, one of the three Bush stimulus's went out to all taxpayers in the form of a check, bet you spent yours without whining.

July 10 2014 at 8:50 AM Report abuse +1 rate up rate down
true.liberal

It's difficult to say which "stimulus" the original poster referenced. Is it QE, or the massive "stimulus" implemented by Obama in early '09, or the similar but smaller ones Bush previously implemented. Of course, none of these actually stimulated anything beyond the disastrous increase in the importance of government goons in citizens lives.

However, it's an important distinction, and conflating the two only adds to the confusion.

QE essentially did go up in the air (at least, so far). It's money created out of thin air that largely sits idle in excess reserves at the Fed. It doesn't have to be paid back, because instead of representing debt, it's merely printed money. And of course, if it actually stimulated anything we wouldn't have an economy contracting by 2.9% over 5 years after it was initiated, such as occurred in Q1. The only good news is that so far, because it hasn't really helped anyone, it also hasn't really caused any macro economic damage either. But see my post below as to how and why that might be about to change.

The series of government spending "stimulus" on the other hand does represent borrowed money. So, of course, they do have to be repaid. And unlike QE, whose end result we're still awaiting, we already have evidence that these "stimulus" did more harm than good.

Since every dime of "stimulus" spent by a government goon was a dime that came from citizens via either taxation or borrowing, it was ALL monies that would have been spent or invested anyway. In other words, an $800 billion increase in goon spending equates to an $800 billion decrease in private sector saving and investment.

It is for this reason that a non-partisan academic study conducted by economists at Ohio State University concluded that the Obama "stimulus" was responsible for destroying 550,000 American jobs. The $800 billion increase in goon spending created 450,000 new jobs, but the resulting $800 billion decrease in private sector spending and investment destroyed 1,000,000 other jobs, producing a net reduction of 550,000 jobs.

QE was essentially an ill-advised attempt to use monetary policy tools to overcome the hubris caused by fiscal policy mismanagement. Of course, in typical goon fashion, the more the mouth-breathers do, the more the hubris that ultimately results, and the more citizens ultimately suffer.

July 10 2014 at 9:21 AM Report abuse rate up rate down
true.liberal

It will likely be sometime after October that things get interesting.

It's not eliminating QE that's the difficult part. If anything, we'd be better off had that been done earlier, so all else remaining constant, that's actually good news.

The mess is what happens next with all the liquidity the Fed has created. 2015/2016 should be the interesting part.

July 10 2014 at 8:57 AM Report abuse rate up rate down Reply
roselace14

The Fed has created a huge snarled-up mess that it really has no idea how to unwind.

October should be --- um --- interesting. Yeah, that would be the word for it. Interesting.

July 09 2014 at 11:12 PM Report abuse rate up rate down Reply
1 reply to roselace14's comment
scottee

audited and ending The Fed would help...who will do that besides the Paul men?

July 10 2014 at 8:14 AM Report abuse rate up rate down Reply
true.liberal

The last 5 paragraphs of this article are the important part. In fact, despite being a topic I've never seen DF address (and still only discussed in the most peripheral manner), it's all that really matters in the near to intermediate term regarding monetary policy.

In the past, the Fed manipulated the funds rate by buying or selling securities to banks, which in turn added or reduced banks reserves at the Fed, making these reserves “scarce” or “plentiful.” It withdrew reserves by selling securities to push rates up and added reserves by buying securities to push rates down – a simple “supply and demand” calculation.

However, now that the Fed has injected $3 trillion in “excess reserves” via QE, there is no way to make reserves “scarce” without completely unwinding the Fed’s massive balance sheet. As long as banks have excess reserves, they do not need to borrow reserves from other banks to meet their reserve requirements. In fact, over the past few years, as excess reserves have piled up, the amount of actual trading in the overnight reserve market has contracted sharply.

The latest idea is that by raising the rate the Fed pays on excess reserves, the few banks who were participating in the overnight reserve market would demand higher rates. The problem is that with all these excess reserves, most of the lending in the overnight reserve market is now done by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks who, by law, are not allowed to be paid interest by the Fed on excess reserves. This is the whole notion behind the “reverse repo” idea mentioned in the article.

As the article also stipulates, this is a new idea that has never been tried previously, and remains in test phase. It is far from clear that this will work. Nor is it clear that it will change monetary policy all that much. With so many excess reserves in the system, higher interest rates would not, in themselves, tighten money in the system. Only if the Fed paid banks more to hold reserves at the Fed than they could earn by lending them to customers could the Fed affect money growth. If banks instead decided to lend these excess reserves into the private economy anyway, the Fed would face an explosion of money growth.

And, of course, that would mean an explosion in inflation.

July 09 2014 at 9:07 PM Report abuse +1 rate up rate down Reply
Iselin007

pdbocc


Robert E Lee was the father in law of Charlotte Wickham the first wife of his son Rooney Lee.

As noted in the other posts President Greald Ford is related to the Wickham family the same family that married into the (Robert E Lee) family that he as President of the United States gave US citizenship to post humously .

July 09 2014 at 6:24 PM Report abuse -4 rate up rate down Reply
Iselin007

This is the President Gerald Ford's tie in to the Wickham Family:

Barnabas Wines m. Anna Eddy
.Prudence Wines m. John Goldsmith
|.John Goldsmith m. Mary Vail
| .Zacheus Goldsmith m. Deborah Corey
| .Mary Goldsmith m. PARKER WICKHAM (1727-1785), American Revolution Loyalist
| .Parnel Wickham m. James Reeve
| .Anna Reeve m. William Wickham
| .WILLIAM WICKHAM (1819-1881), Suffolk County, NY district attorney, m. Sarah Elizabeth Havens (same as 105 & 106, above & below)
.Barnabas Wines, Jr. m. Mary ------
.Barnabas Wines III m. Anna ------
|.Barnabas Wines IV m. Bethia Terrill
| .Anna Wines m. James Reeve
| .James Reeve m. Parnel Wickham

| .Anna Reeve m. William Wickham
| .WILLIAM WICKHAM (1819-1881), Suffolk County, NY district attorney, m. Sarah Elizabeth Havens (same as 105 & 106, above & below)
.Samuel Wines m. Abigail ------
.Ann Wines m. John Many Manney .Wines Manney m. Alida Vanderburgh
.John Manney m. Elizabeth Collins
.Elda V. Manney m. John Ayer
.George Manney Ayer m. Amy Gridley Butler
.Adele Augusta Ayer m. Levi Addison Gardner
.Dorothy Ayer Gardner m. Leslie Lynch King
.Leslie Lynch King, Jr. a.k.a. GERALD RUDOLPH FORD (1913- ), 38th U.S. president (re-named after step-father)

July 09 2014 at 6:15 PM Report abuse -6 rate up rate down Reply
1 reply to Iselin007's comment
Iselin007

Parker Wickham is my great ..... grandfather Joseph Wickham's brother. I am a direct descendant.

Joseph Wickham 1728-1782 Brother of Parker.

July 09 2014 at 8:01 PM Report abuse -4 rate up rate down Reply
teabuster2

dopey.obamite

Coukd it be that you have no frigging clue what you're talking about?
======================================================
"no frigging clue " That sounds more like dopey

July 09 2014 at 6:04 PM Report abuse -1 rate up rate down Reply
1 reply to teabuster2's comment
mrsperlosi

Somey perhaps you should refrain from imbibing in the spirits dear.

July 09 2014 at 7:09 PM Report abuse -3 rate up rate down Reply
Iselin007

Does any one know who Leslie Lynch King is? It was the original name of our former President Gerald Ford who changed his name after his father left his mother. He picked the name of an uncle.

President Gerald Ford was the only President to give long deceased CSA General Robert E Lee his US citizenship back posthumously. President Gerald Ford was related to my famly tree. Charlotte Wickham was the first wife of Rooney Lee who was son of Robert E Lee. Gerald Ford must of been aware that he gave US citizenship back to the father inlaw of of one of his own family relatives! Charlotte Wickham was related to CSA Brigadier General Williams Carter Wickham.

So you see President Gerald Ford was pretty slick because at the time many of the other members of Congress or other Cabinet members could of not know that.

And like most people on the Internet your likely cratching your head but supposedly all of this is in fact true.

July 09 2014 at 5:23 PM Report abuse -4 rate up rate down Reply
2 replies to Iselin007's comment
pdbocc

You say President Gerald Ford was the only President to give General Robert E Lee his US citizenship back, isn't one President doing that all that's required? Or are you implying that more than one President must do it?

July 09 2014 at 5:37 PM Report abuse +2 rate up rate down Reply
Iselin007

http://www.archives.gov/publications/prologue/2005/spring/piece-lee.html

At the August 5, 1975, signing ceremony, President Gerald R. Ford acknowledged the discovery of Lee's Oath of Allegiance in the National Archives and remarked: "e;General Lee's character has been an example to succeeding generations, making the restoration of his citizenship an event in which every American can take pride."e;

Leslie Lynch King jr ( Better know as Gerald R Ford 38th President Of the United States.

| .Anna Reeve m. William Wickham
| .WILLIAM WICKHAM (1819-1881), Suffolk County, NY district attorney, m. Sarah Elizabeth Havens (same as 105 & 106, above & below)
.Samuel Wines m. Abigail ------
.Ann Wines m. John Many Manney .Wines Manney m. Alida Vanderburgh
.John Manney m. Elizabeth Collins
.Elda V. Manney m. John Ayer
.George Manney Ayer m. Amy Gridley Butler
.Adele Augusta Ayer m. Levi Addison Gardner
.Dorothy Ayer Gardner m. Leslie Lynch King
.Leslie Lynch King, Jr. a.k.a. GERALD RUDOLPH FORD (1913- ), 38th U.S. president (re-named after step-father)

July 09 2014 at 7:51 PM Report abuse -4 rate up rate down Reply