Results 1 to 2 of 2

Thread: Fed in Talks With Money Market Funds to Help Drain $1 Trillion

  1. #1
    Featured Member
    Joined
    Nov 2006
    Posts
    950
    Thanks
    1
    Thanked 651 Times in 272 Posts

    Default Fed in Talks With Money Market Funds to Help Drain $1 Trillion

    http://www.bloomberg.com/apps/news?p..._iDKbl1g&pos=5

    "The Federal Reserve is in talks with money-market mutual funds on agreements to help drain as much as $1 trillion from the financial system as policy makers prepare for the first interest-rate increase since June 2006, according to a person familiar with the discussions.

    The central bank is looking to the $3.2 trillion money- market mutual-fund industry because the 18 so-called primary dealers that trade directly with the Fed have a capacity limited to about $100 billion, estimates Joseph Abate, a money-market strategist at Barclays Capital in New York.

    Money-market funds may welcome the opportunity to trade with the Fed after the financial crisis reduced the supply of safe assets in which they can invest. In one example of demand for such assets, auctions on four-week Treasury bills have attracted an average of $5.47 in bids for every dollar sold this year, compared with an average of $3.77 last year, according to Bloomberg data. Yields on the four-week bill fell to five basis points from 20 basis points a year ago.

    “There are lots of great credit stories, but the option of going with the Fed and the government -- it takes away part of the risk,” said Deborah Cunningham, a chief investment officer at Federated Investors Inc. in Pittsburgh, which manages $318 billion in money-market investments. Conversations with the Fed “seem pretty positive,” she said, adding that the Fed and the industry should be in a position to conduct operations before the end of the year.

    Fannie, Freddie

    Chairman Ben S. Bernanke yesterday charted ways the Fed might withdraw record monetary stimulus pumped into the economy to fight the recession. Among the central bank’s tools are reverse repurchase agreements, in which the Fed sells securities with the intention of repurchasing them at a later date.

    The Fed is also considering reverse repurchase agreements with mortgage lenders Fannie Mae and Freddie Mac, said the person familiar with the discussions.
    Freddie Mac spokeswoman Sharon McHale declined to comment. Fannie Mae spokesman Brian Faith also declined to comment.

    “To further increase its capacity to drain reserves through reverse repos,” Bernanke said, the Fed is “in the process of expanding the set of counterparties with which it can transact” beyond primary dealers of government securities.

    The primary dealers, which are required to bid at auctions of Treasury notes and trade directly with the New York Fed’s markets desk, include BNP Paribas Securities Corp., Banc of America Securities LLC and Goldman Sachs & Co.

    Bernanke repeated yesterday that while interest rates are likely to stay low for an “extended period,” the Fed in “due course” will need to “begin to tighten monetary conditions to prevent the development of inflationary pressures.”

    Securities Purchases

    The central bank has created more than $1 trillion in excess reserves in the banking system through its purchases of $300 billion of Treasury debt and $1.25 trillion of mortgage- backed securities. To put upward pressure on the federal funds rate, the Fed may need to drain as much as $800 billion, Abate estimates.

    One potential tightening tool is the interest rate on reserves that commercial banks keep on deposit at the Fed. By raising that rate, the central bank “will be able to put significant upward pressure on all short-term interest rates,” Bernanke said.

    The Fed can also use reverse repos to shrink the quantity of reserves, which in turn gives it “tighter control over short-term interest rates,” he said.

    Fed officials face the risk that when they start to tighten policy by raising the rate they pay banks on reserves, other market rates may not follow. That would keep monetary conditions too loose in an expansion.

    Controlling Rates

    “They still seem nervous that they might not be able to control short rates, and if they can’t control short rates, how do they tighten?” said Mark Spindel, chief investment officer at Potomac River Capital LLC, which manages $200 million in Washington.

    The Fed has sought to keep the benchmark rate in a range of zero to 0.25 percent since December 2008. The federal funds rate is now 0.13 percent, even though banks can earn 0.25 percent by keeping their money on deposit at the Fed.

    One reason for the discrepancy is that Fannie and Freddie have become “significant sellers” of funds in the overnight market and aren’t eligible to place cash on deposit at the Fed
    , according to a December research paper by the New York Fed.

    Some hurdles remain in the Fed’s efforts to secure bigger repo capacity. Fed officials and mutual-fund industry representatives are working on a structure that would allow funds to invest in relatively liquid assets that can be sold in seven days, while allowing the central bank to avoid having to renew billions of dollars in transactions each week.

    “There needs to be liquidity,” said Cunningham of Federated. “A reverse repo contract is not considered to be liquid in the context of anything beyond seven days.”

  2. #2
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: Fed in Talks With Money Market Funds to Help Drain $1 Trillion

    the 'gold foil hat' crowd would tell you that this is 'jawboning' on the part of the FED to try and maintain a pretense that the US dollar's 'value' will be defended. The fact of the matter is that the FED is still 'printing money' at record breaking speed in order to fund stimulus spending commitments this year, and that any official increase in US interest rates would tank what's left of the housing market / tentative recovery ... not to mention the trillions of dollars worth of mortgage paper held by US gov't agencies.

Similar Threads

  1. Replies: 2
    Last Post: 06-20-2009, 08:38 AM
  2. Replies: 1
    Last Post: 11-13-2008, 03:00 AM
  3. Money market funds start to take a dive
    By Deogol in forum Dollar Den
    Replies: 4
    Last Post: 09-17-2008, 05:21 PM
  4. Money Market Funds now 'breaking the buck' ...
    By Melonie in forum Dollar Den
    Replies: 23
    Last Post: 11-18-2007, 08:14 PM
  5. Money Market Funds now 'breaking the buck' ...
    By Melonie in forum Dollar Den
    Replies: 0
    Last Post: 11-15-2007, 03:59 AM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •