Back to the Drawing Board
Chief Economist Vincent Reinhart discusses the pressure in reserve markets during September and offers a blueprint for long-term management of the Fed’s balance sheet.
The topic more in doubt than the upcoming rate decision is the Fed’s longer-term plans for its balance sheet. Much ink was spilled over the pressure in reserve markets late in the quarter that led the Fed’s open market desk to add reserves on a temporary basis to blunt a surge in overnight interest rates.
We suggest that the issue was technical in nature, and in an area where the Fed has expertise. Thus far, the Fed’s answer is to throw reserves at the problem with temporary adding operations and scheduling outright purchases of Treasury securities.