Federal Reserves May Start Allowing Banks to Exchange Treasury for Reserves

Officials at the Federal Reserve are looking into a new form of quantitative easing that would give banks the power to get reserves in exchange for the treasury. The goal is to provide them with the liquidity they need and decrease the central bank’s balance sheet by up to $4 trillion. The standing repo facility, as it is called, is still at the early stages of discussion.

The plan was proposed by Jane Ihrig and David Andolfatto, two respected economists with the Fed. They have written two papers with detailed information about how the plan will reduce the regulatory burden for banks that prefer to hold only ultra-safe assets.

Andolfatto and Ihrig, in their first paper, talked about how the plan will allow the Fed to clear their balance sheet without disrupting the market. They said; “With the proposed policy, banks will be comfortable holding treasury which would, in turn, help them accommodate stress scenarios rather than reserves. As a result, the demand for reserves will reduce significantly. The Fed’s balance sheet will be pulled much closer to historic levels.”

A few weeks after the first paper was released, another paper was written and they acknowledged that the first paper was received well and open to debate among industry leaders. While some leaders liked the idea, others were skeptical about it. Those who support the policy see it as a minimal to no risk method of providing banks with the assistance they need during difficult economic times. It is a stealthy form of quantitative easing.

A researcher from Mercatus Center, David Beckworth, said that this policy makes transitioning much easier. In his words; “The policy makes transitioning much easier. Banks will not be obligated to hold onto reserves if they know they can get it quickly by selling treasury to the Fed. It is a market-driven form of quantitative easing.”

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