Fed Saw Investors As Too Complacent On Risk As Exit Plan Evolves

‘Supporting Role’

One tool, known as the overnight reverse repurchase facility, “could play a useful supporting role,” according to the minutes. The tool could be used to set the lowest rate at which holders of cash would be willing to lend.

The Fed now pays 0.25 percent interest on bank reserves deposited overnight at the central bank. By contrast, it pays 0.05 percent on cash it borrows through its reverse repo facility, which is used by institutions such as money-market funds, which can’t deposit money at the Fed.

“With the labor market improving and the inflation data tilting higher, Fed officials feel some pressure to express a coherent exit strategy, even though many would agree that we’re still far away,” said Dana Saporta, a U.S. economist at Credit Suisse Group AG in New York.

Many participants agreed that it “would be best” for the Fed to end reinvestment of maturing securities only when it raises rates for the first time since 2006, or even afterward. Most preferred to end after.

That suggests the Fed is comfortable operating with a “very high balance sheet” and has no desire to stop reinvesting until after it begins to raise rates, according to Eric Green, global head of foreign exchange and rates at TD Securities USA LLC in New York.