Fed aggressively ramps up new tool to pry rates higher

Wed Dec 16, 2015 4:51pm EST
 
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By Jonathan Spicer

NEW YORK (Reuters) - The Federal Reserve aggressively expanded a new policy tool to help it raise U.S. interest rates from near zero, saying on Wednesday it anticipated about $2 trillion in bids for a facility to help mop up excess cash in financial markets after years of stimulus.

The U.S. central bank, which raised rates modestly on Wednesday as expected, said there would effectively be no limit on a so-called overnight reverse repurchase program (ON RRP) that is now capped at $300 billion.

The tool would be "limited only by the value of Treasury securities held outright," the New York Fed said in a statement. The Fed held some $2.5 trillion in Treasury bonds last week in its portfolio of nearly $4.5 trillion total.

Analysts had expected the Fed to only double the size of the repo program to around $600 billion. But policymakers have repeated they wanted to prove they could still control short-term markets.

"It's effectively un-capped because they are willing to reverse repo out all the securities they have available," said Louis Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey.

The decision suggests Fed policymakers are doing all they can to ensure that rates, which have been at rock bottom for seven years, will actually rise on Thursday despite some $2.6 trillion in excess bank reserves flooding financial markets and making the job far more difficult than in the past.

The nightmare scenario would be that short-term borrowing costs do not rise enough due to years of Fed bond-buying meant to stimulate the choppy U.S. economic recovery.

  Continued...

 
U.S. Federal Reserve Chairman Janet Yellen holds a news conference to announce raised interest rates in Washington December 16, 2015.  REUTERS/Jonathan Ernst -