Federal Reserve conducts 'reverse repos'

Posted Dec 3rd 2009 5:30PM by Connie Madon
Filed under: Press Releases, Market Matters, Money and Finance Today, Federal Reserve

This post is quite short, yet very important. For the first time, the Fed is conducting "Reverse repos."

Why is this so significant? For the past year the Fed has been doing "repos." A repo is when the Fed steps in and buys Treasury securities. The effect is to create a credit on bank balance sheets and consequently give them more lending power.

Now, today, the Fed is doing "reverse repos." A reverse repo is just the opposite. The Fed sold $180 million of Treasuries in three tri party reverse repos. The Fed sells these securities with the agreement to buy them back at a higher price at a later date. This has the opposite effect of a repo. The buyers must take money out of circulation to pay for the securities, thus shrinking the available lending dollars a bank holds.

Why the Fed is doing this is unknown. It may be political, since Bernake is up for reconfirmation this week. It may be to show Congress that he can manage withdrawing the huge sums that he created through the repos. Who knows?

As an aside, always keep an eye on Fed activities.

Tags: federal reserve, FederalReserve, reverse repo, ReverseRepo, securities

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Reader Comments (Page 1 of 1)

12-03-2009 @ 5:56PM

Peter Van Schaik said...

So the Fed is mopping up some liquidity which the banks aren't lending anyway since the bankers have finally decided to act like the tight fisted, conservative bankers of yesteryear and only lend to those who can absolutely guarantee they can handle the loan. In other words, they will lend only to those who don't really need the money. That's not enough for a recovery: If the bankers don't lend, the economy won't mend. http://jpetervanschaik.googlepages.com

12-03-2009 @ 5:58PM

william lindblad said...

Nothing more than another "atta boy" for bad behavior.

It will be interesting to see how ol'ben handles the forthcoming commercial sector. I guess that pat them on the head is in - while they really deserve a kick in the ass.

I guess it only goes to show. Schumer views him as a savior
and Dodd sees a saint. I guess that they thought that Greenspan was next to God.

12-03-2009 @ 9:00PM

ejhickey said...

"The Fed sells these securities with the agreement to buy them back at a higher price at a later date."

There is one thing I do not understand. If the Fed is buying these securities back at a higher price, isn't the removal of liquidity only temporary and won't the fed actually be putting more money back into the system? Therefore aren't reverse repos really a sham device to make it look like liquidity is being withdrawn when it actually has the liquidity in temporary storage only to be put back when no one is looking.