The U.S. Federal Reserve is studying the idea of borrowing from money market mutual funds as part of eventual steps to withdraw stimulus, The Financial Times reported.
The Fed would borrow from the funds via reverse repurchase agreements involving some of the huge portfolio of mortgage-backed securities and U.S. Treasuries that it acquired as it fought the financial crisis, the newspaper reported, without citing any sources.
This would drain liquidity from the financial system, helping to avoid a burst of inflation as the economy recovered.
The Financial Times said Fed officials had in recent days held discussions with market participants on how it might implement such a scheme.
The Fed is considering whether to conduct a pilot scheme, but worries such a test might be seen as a signal that the central bank was about to drain liquidity on a large scale, the newspaper said. In the near term, a big drain remains unlikely, it added.
The central bank held interest rates at close to zero on Wednesday and upgraded its assessment of the U.S. economy, saying growth had returned after a deep recession.
The Fed also said it would slow its purchases of mortgage debt to extend that program’s life until the end of March, in a move toward withdrawing the central bank’s extraordinary support for the economy and markets during the contraction.The idea of the Fed using reverse repos to help unwind policy is not new; Fed chairman Ben Bernanke identified them as a potential means of soaking up liquidity in July. But the market had previously expected the repos to be done with primary dealers, including former Wall Street investment banks....MORE