April 8, 2015 / 7:25 PM / 4 years ago

UPDATE 1-Fed mulls selling bonds to potentially trim repo use -minutes

(Adds detail from minutes, background)

By Jonathan Spicer

NEW YORK, April 8 (Reuters) - Federal Reserve officials are considering selling short-term bonds if, after they tighten U.S. monetary policy, it becomes necessary to trim usage of a new tool they plan to use to help lift interest rates.

The option, revealed in minutes of the U.S. central bank’s March policy meeting, was one of several on the table. But it could come as a surprise given the Fed has all but ruled out sales from its $4.5 trillion portfolio of Treasury and mortgage assets.

Policymakers considered a range of options to both ramp up use of the new tool, called an overnight reverse repurchase facility, or ON RRP, and to later reduce its use if necessary.

When rates are finally raised, options to increase use included temporarily raising the cap on overnight repos or eliminating the cap altogether, the minutes showed on Wednesday. The cap currently is $300 billion.

At a later date, if it becomes necessary to actively reduce interest in ON RRP because markets are looking unstable, the Fed could sell bonds or allow its massive portfolio of assets to run off sooner than planned, the minutes show.

The Fed has said it will keep topping up its balance sheet until some time after rates are raised. Selling assets would give money market funds more places to invest short term, instead of using the overnight reverse repurchase facility.

Less risky options for the Fed included increasing use of term reverse repos and so-called term deposit facilities, or raising the rate it pays on excess bank reserves, which policymakers saw as the best initial option.

“Many” Fed officials said at the meeting that selling short-term assets “could be considered at some stage if necessary.”

But “a number” of them said it could be difficult to explain it to the public. The move risked “an outsized market reaction” if it were seen to signal “a tighter overall stance of monetary policy than they had anticipated” or a greater willingness to sell longer-term bonds, they said.

The Fed has been testing new tools for months to help mop up trillions of dollars of excess reserves in financial markets, in the wake of the financial crisis.

While the Fed wants to ensure the tools will help it lift borrowing costs when the time comes, it doesn’t want to destabilize short-term money markets.

A couple of Fed officials said that risks to financial stability would only be small if the cap on ON RRP were temporarily raised, the minutes show. (Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)

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