Fed’s Fisher, Plosser Dissented Against Extension of Repo Tool

Federal Reserve Bank of Dallas President Richard Fisher and Philadelphia’s Charles Plosser dissented last month against the extension of the Fed’s new fixed-rate reverse repurchase program, objecting to the absence of limits on the amount of money counterparties can post.

“Fisher and Plosser dissented because of their preference for retaining a cap on the maximum size of counterparties’ offers during the extension,” according to minutes of the Federal Open Market Committee’s Jan. 28-29 meeting released today. Plosser “also preferred a shorter extension of the exercise.”

Policy makers last month extended for a year tests of an overnight fixed-rate reverse repurchase program that could serve as an additional tool for the Fed when it eventually seeks to raise interest rates. The FOMC authorized offering a fixed-rate from zero to five basis points, or 0.05 percentage point.

“Any change to the offered rate within the range specified above or the per-counterparty bid limits will require approval of the chairman,” according to minutes of the January meeting.

James Hoard, a spokesman for the Dallas Fed, said Fisher declined to comment further. Marilyn Wimp, a spokeswoman for the Philadelphia Fed, declined to comment.

Policy makers in September voted to begin testing the tool. The minutes of that meeting showed the FOMC placed a $1 billion cap on the daily allotment per counterparty.

The New York Fed said last month that it increased the maximum allotment cap per counterparty per day to $5 billion.

Allotment Cap

“It is expected that, over the coming months, the maximum allotment cap may be increased further,” the New York Fed said in a Jan. 29 statement.

The Fed, which is still buying bonds to support the economy, has been testing the repo program as part of its preparations to eventually withdraw record accommodation.

In a reverse repo, the Fed lends securities for a set period, temporarily draining cash from the banking system. At maturity, the securities are returned to the Fed, and the cash to its counterparties.

Simon Potter, the New York Fed’s markets group chief, said on Dec. 2 the new repo tool will probably play a central role in tightening monetary policy.

Market “participants have indicated that they expect that a facility, if executed in full scale in the future, should be an effective tool for increasing the Federal Reserve’s control of short-term money market rates,” Potter said in a Dec. 2 speech in New York.

“Operationally, market participants generally characterize the exercise as smooth, with minimal disruptions,” he said.

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