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Fed Announces Expansion of Reverse Repo Program: Goal is Deflation

Today, the Fed goes one step further, after noting increasing pressure by its own members to commence a tightening policy, and has announced the expansion of its reverse repo program with Primary Dealers, by adding additional counterparties. And guess who the first expansion wave focuses on - why Money Market mutual funds of course. Let's just do all we can to drain the money market system asap, shall we. Statement Regarding Counterparties for Reverse Repurchase Agreements The Federal Reserve Bank of New York today announced the beginning of a program to expand its counterparties for conducting reverse repurchase agreement transactions ("reverse repos"). This expansion is intended to enhance the capacity of such operations to drain reserves beyond what could likely be conducted through the New York Fed's traditional counterparties, the Primary Dealers. This announcement is pursuant to the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, which announced that the New York Fed was studying the possibility of expanding its counterparties for these operations. The additional counterparties will not be eligible to participate in transactions conducted by the New York Fed other than reverse repos. This expansion of counterparties for the reverse repo program is a matter of prudent advance planning, and no inference should be drawn about the timing of any prospective monetary policy operation. The initial efforts of the New York Fed will be aimed at firms that typically provide large amounts of short-term funding to the financial markets. This approach will ensure that the Federal Reserve quickly achieves significant capacity for conducting reverse repo operations while allowing the Trading Desk at the New York Fed to utilize its current infrastructure for conducting and settling such operations. Over time, the New York Fed expects it will modify the counterparty criteria to include a broader set of counterparties.

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