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Fed's Lacker says reverse repos should only be used as backstop
June 26, 2014 / 2:55 PM / 3 years ago

Fed's Lacker says reverse repos should only be used as backstop

LYNCHBURG, Va., June 26 (Reuters) - The Fed’s policy of reverse repurchase agreements should only be used as a temporary fix and not a part of a long-term strategy, a top Fed official said on Thursday.

“I don’t see a need for overnight reverse repurchase agreements on an ongoing basis as an active part of implementing monetary policy,” Richmond Federal Reserve Bank President Jeffrey Lacker told reporters after a speech in Lynchburg, Virginia.

Lacker said the so-called reverse repo program was best used as an insurance policy or backstop.

That view goes counter to some Fed officials who believe the reverse repo could ultimately supersede the Federal funds rate as the central bank’s primary policy tool.

Lacker also said that he sees inflation firming this year, and that data gathered in the last few months was not the “noise” that some think, underscoring his hawkish view that inflation threats are gaining traction.

He would not say exactly when he expects interest rates to lift off, only saying that a variety of economic factors will weigh on that decision, likely in the middle of next year. Lacker said he sees economic growth in second half of 2014 at 2.25 percent to 2.5 percent.

The New York Federal Reserve Bank has been testing the reverse repo facility since September as a way to help control short-term interest rates, and has seen strong demand from money market funds and other bidders.

In reverse repos, the Fed temporarily drains cash from the financial system by borrowing funds overnight from banks, large money market mutual funds and others, offering them Treasury securities as collateral. Banks and the funds are currently receiving 5 basis points, or 0.05 percent, for the overnight loan, up from 1 basis point in September. (Reporting by Michael Flaherty; Editing by Paul Simao)

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