Fed’s Monetary Policy Report: More Tightening

Just as Federal Reserve chairman Ben Bernanke’s congressional testimony appeared to be simply a reiteration of his Feb. 10 outline of steps that might be taken in economic recovery to normalize interest rate policy, the accompanying Monetary Policy Report also summarized a well-known sequence of tightening steps that might occur.

The report indicated reverse repos could eventually reach hundreds of billions of dollars in face amount, and might be done against mortgage-backed security holdings.

It emphasized that the exact sequence of tightening steps and combination of tools remains up in the air but “will depend on economic and financial developments.”

One possible sequence would be test operations “on a limited basis” and then a scaling-up of the size of the operations.

The report said the Fed does not currently anticipate asset sales, “at least until after policy-tightening has gotten underway.”

Interest on reserves — which the chairman also mentioned earlier this month as a possible alternative policy rate, along with targets for reserve quantities — are again mentioned as a possible guide to Fed policy “for a time” until market rates normalize.

The report emphasizes that if this alternative rate is adopted, the Fed will also monitor a range of market rates.

In sum, the sequencing section of the report says that no decisions have yet been undertaken.

— Market News International

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