Why is the Federal Reserve doing "reverse repos?" What is a "reverse repo" and how does it work?
Looking back at the past year, the Federal Reserve has printed piles of money and pumped them into the banking system and the economy. Now there is a good deal of worry that all of this excess money sloshing around will create inflation, not to mention that our dollar will head downward on world markets, creating uncertainty among trading partners across the globe. China stepped in the currency markets yesterday and "bought" dollars to support the dollar.
The Federal Reserve, mindful of the turmoil that a weakening dollar has on world markets has tested the use of "reverse repos" to drain money from our banking system. In a reverse repo the Fed sells assets such as Treasury securities to dealers for cash with the agreement to buy them back at a slightly higher price at a later date. The effect is that bank reserves are drained from the financial system.
The use of reverse repos not only drains money from the system, but is also a means of keeping interest rates low. In a statement Ben Bernake, Chairman of the Federal Reserve said: "My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period." He added: "At some point, however, as the economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road."
Since the onset of the financial crisis, the Fed has created $800 billion in excess reserves which, if left unchecked would present a serious inflation risk.
Should the Fed start draining money from the financial system now or wait and do it later on?
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Reader Comments (Page 1 of 1)
10-19-2009 @ 3:35PM
rickbarclay said...
Doesn't sound too bright to me! Sounds like a big scam where cash in temporarily taken out of the monetary system only to inflate later on with the Federal Reserve printing the interest payments out of THIN AIR!
What crap they won't think of!