More on Fed's Use of Excess Reserves

The Federal Reserve uses repo/reverse repo agreements. Repo (or repurchase) agreements to make collaterized loans to Primary Dealers, and reverse repo agreements to borrow money from Primary Dealers. (Here's information from the New York Fed.)

Might the New York Fed's president (see the video on my previous post) be referring to the reverse repo agreements when he said the Fed was using the excess reserves to buy Treasuries?

I checked the Fed's balance sheet (or what they are trying to pass as balance sheet). They have reverse repo agreements on the liabilities side about $67 billion worth. The footnote (15) says it is an estimate. Estimate. No one at the Fed is willing to disclose how much and what duration and with which Primary Dealer (if they know). The NY Fed says on their site that repo/reverse repo is usually overnight, but can be longer.

The official reverse repo amount is too small to account for POMO (Permanent Open Market Operation). The Fed has $1.5 trillion Treasuries, agencies, MBS. Currency component of M1 has been rising since the beginning of 2008 (see the chart; it was created at St. Louis Fed's FRED), so I do think the Fed has been printing money and quietly putting into circulation. They also get money about $100 billion each month from the Treasury through CMB sale (Supplementary Financing Program, or SFP, which started last September at the request of the Fed), and they are not saying specifically what they are using it for. If they are using the excess reserves for POMO, that sure sounds like a totally under-the-table operation.

Then I found this from the New York Fed's website in the press release on October 6, 2008 discussing the interest payment on reserves: [emphasis is mine]

"The payment of interest on excess reserves will permit the Federal Reserve to expand its balance sheet as necessary to provide the liquidity necessary to support financial stability while implementing the monetary policy that is appropriate in light of the System's macroeconomic objectives of maximum employment and price stability."

So... was this an oblique admission that the Federal Reserve would be using the excess reserves to do POMO, and the interest payment on the excess reserves had little to do with establishing "a lower bound on the federal funds rate" as the Fed said in the above press release but it was simply an interest the Fed would pay to borrow money from the member banks?

Remember, if the Fed is indeed using the excess reserves for Treasury and agency bond purchase, the Fed is borrowing 24-hour money to invest in notes (2 to 10 years) and bonds (up to 30 years).

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