“From a monetary policy standpoint, I’d say that at the margin it means they can focus on whether to cut or not cut at the next meeting, and not be bothered with the discussion about the plumbing,” said Thomas Costerg, senior economist at Pictet Wealth Management.
By purchasing securities, the Fed will add a cushion to the supply of excess bank reserves, a pool of money that helps provide liquidity to the overnight market.
Overnight money markets -- where banks, investment funds, companies and other institutions borrow and lend cash -- help set the baseline costs for longer-term lending. The Fed seeks to control overnight rates as a tool for influencing the broader economy.
The Fed said it will also continue to inject liquidity into the markets through overnight and term repurchase agreements. Term repo operations “will generally be conducted twice per week, initially in an offering amount of at least $35 billion per operation,” the Fed said. “Overnight repo operations will be conducted daily, initially in an offering amount of at least $75 billion per operation.”
Until recently, the Fed was reducing the size of its balance sheet, unwinding some of the crises-era bond purchases in a process that lowered the supply of excess reserves. Fed officials had readily admitted they didn’t know how far that process could go before it might cause a shortage of reserves and disrupt money markets, but they anticipated that threshold would be lower than they now believe.
“It very much looked like we were still a bit perhaps above that” threshold, Powell said in Denver. “Until September, when we found we probably weren’t.”
For the week through Sept. 4, bank reserves deposited at the Fed totaled $1.49 trillion, according to data from the central bank. That fell to $1.39 trillion on Sept. 18 before bouncing back to $1.51 trillion in data reported Oct. 10.
This article provided by Bloomberg News.