DALLAS, May 19 (Reuters) - The Federal Reserve’s reverse repo tool should be a part of the central bank’s toolkit when it starts raising interest rates, a top Fed policymaker said on Monday, adding that it has proven to be effective in draining reserves from the banking system.
The Fed has traditionally targeted the fed funds rate, the overnight lending rate between banks, to set monetary policy. The Fed is currently analyzing and debating whether it should continue to target that rate or adopt another target, San Francisco Fed President John Williams told reporters after a monetary policy conference at the year-old George W. Bush Presidential Center in Dallas.
“The question really is, how is the best way to implement monetary policy going forward,” Williams said. Even if the Fed continues to use the fed funds rate as its main policy lever, he said, it should incorporate the reverse repo rate in its operations.
“Reverse repo is hugely important no matter what we do,” he said. (Reporting by Ann Saphir; Editing by Chris Reese)