Fed Reserve’s exit strategy may use money market funds to avoid inflation

September 24, 2009

(ChattahBox) — The Federal Reserve is is studying the idea of borrowing money from the money-market mutual fund industry, Financial Times reports as part of its exit strategy to avoid post-crisis inflation. The central bank wants to use the deeply funded money market sector to refinance part of the giant portfolio of mortgage-backed securities and Treasuries bought during the crisis as collateral, using a technique called “reverse repos”.

The central bank is now considering dealing with money market funds because it does not think the primary dealers have deep enough pockets to provide more than about $100 billion, the Financial Times said. The Fed’s strategy is part of its effort to ensure it will be able to eventually drain liquidity and raise interest rates when it feels the moment is right.  The strategy theoretically would neutralise the monetary consequences of the assets refinanced in this way, although the Fed would still hold the credit risk and mark-to-market risk on the portfolio.  The FT said Fed officials had in recent days held discussions with market participants on how it might implement such a scheme.


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