Fed limits on ‘reverse repos’ could undermine interest rate floor

Henry Liu Updated onSeptember 22, 2014

fed limits on reverse repos could undermine interest rate floor 104506

Federal Reserve Chairwoman Janet Yellen spent months devising a strategy for managing short-term interest rates. Two days after the plan’s release, some market participants warn the new approach may have flaws.

Analysts and others said the Fed’s new limits on a tool designed to influence short-term rates could undermine its effectiveness. The Fed plans to use the tool, known as overnight reverse repurchase agreements, when it starts raising rates from near zero sometime next year as the economy strengthens.

The Fed uses so-called reverse repos to soak up cash from money-market mutual funds and other nonbank financial institutions and pays them interest in return. The interest rate the Fed sets on these instruments—now 0.05%—will gradually rise as the Fed raises rates.

Henry Liu

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