In a post published here in mid-November, I traced the Fed’s repo-market troubles to post-2008 changes in the importance and volatility of two of the Fed’s non-reserve liabilities: TGA balances and the foreign repo pool. Then, in a companion piece, I made some suggestions for reining-in those liabilities, as an alternative to having the Fed continue to increase the size of its balance sheet–one that could actually allow that balance sheet to shrink further. The proposed reforms would even make it relatively easy for the Fed to switch from its present floor operating system to a corridor system, with a correspondingly slim balance sheet.
Since I wrote those posts, I’ve come across further, relevant information. Besides reinforcing my confidence in the proposals’ merits, the new information also suggests that implementing them will be even easier than I’d previously supposed.
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