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| 10yr treasury yield (source:
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There was however another passage in the minutes that wasn't
broadly covered in the mass media.
July FOMC minutes: - In support of the Committee’s
longer-run planning for improvements in the implementation
of monetary policy, the Desk report also included a briefing
on the potential for establishing a fixed-rate,
full-allotment overnight reverse repurchase agreement
facility as an additional tool for managing money market
interest rates. The presentation suggested that such a
facility would allow the Committee to offer an overnight,
risk-free instrument directly to a relatively wide range of
market participants, perhaps complementing the payment of
interest on excess reserves held by banks and thereby
improving the Committee’s ability to keep short-term market
rates at levels that it deems appropriate to achieve its
macroeconomic objectives.
It's an interesting development because this project could
potentially achieve three objectives:
1. The "full-allotment overnight reverse repurchase agreement
facility" can provide competition for bank deposits. While
deposits of under $250K rely of the FDIC insurance, corporate
and institutional depositors remain concerned about bank credit
risk because in a bankruptcy depositors become unsecured
creditors. By allowing non-banks to participate, the Fed creates
a deposit account that is free of counterparty risk (currently
the only way to achieve this is by purchasing treasury bills).
2. Instead of just changing the interest paid on bank reserves
to manage short-term rate policy (in addition to the fed funds
rate), the Fed would now have another monetary tool - adjusting
rates paid on these types of broadly held accounts.
3. By accepting broader deposits, the Fed can effectively "soak
up" excess liquidity and "sterilize" some of its securities
holdings. And by adjusting these rates, the central bank could
fine-tune how much liquidity these accounts attract. This
reduces the need to sell securities in order to drain liquidity
from the system.
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