Federal Funds Day 11 Dr. Andrew L. H. Parkes “Practical Understanding for use in Business” 卜安吉

Jan. 4, 2011Financial Institutions & Markets Day 112 What are Fed Funds? Federal Funds are “excess reserves” at the Federal Reserve Banks. NOT the Fed’s money but a bank’s money (Citigroup, HSBC, for example) on deposit at the Fed. Federal Funds are “excess reserves” at the Federal Reserve Banks. NOT the Fed’s money but a bank’s money (Citigroup, HSBC, for example) on deposit at the Fed. Each bank is required to hold reserves of 10% of demand deposits at the Fed. Each bank is required to hold reserves of 10% of demand deposits at the Fed. Sometimes the banks have extra (excess) Sometimes the banks have extra (excess) They loan out these excess reserves They loan out these excess reserves

Jan. 4, 2011Financial Institutions & Markets Day 113 What are Fed Funds? Usually loaned out overnight – these excess reserves often stay at the Fed. Usually loaned out overnight – these excess reserves often stay at the Fed. Page 262 in our text Page 262 in our text So So Fed Funds are excess reserves loaned out by banks to other banks, overnight Fed Funds are excess reserves loaned out by banks to other banks, overnight The Fed does not control the FF rate, they set a “Target” and use OMO to “hit” this. The Fed does not control the FF rate, they set a “Target” and use OMO to “hit” this.

Jan. 4, 2011Financial Institutions & Markets Day 114 Reverse Repos  Reverse Repurchase Agreement The purchase of securities with the agreement to sell them at a higher price at a specific future date. For the party selling the security (and agreeing to repurchase it in the future) it is a repo for the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.  Investopedia Commentary Repos are classified as a money-market instrument. They are usually used to raise short-term capital.

Jan. 4, 2011Financial Institutions & Markets Day 115 Reverse Repos  United States Federal Reserve use of repos  Repurchase agreements when transacted by the Federal Open Market Committee of the Federal Reserve in open market operations adds reserves to the banking system and then after a specified period of time withdraws them; reverse repos initially drain reserves and later add them back. Federal Open Market Committee Federal Reserveopen market operationsreservesFederal Open Market Committee Federal Reserveopen market operationsreserves

Jan. 4, 2011Financial Institutions & Markets Day 116 Reverse Repos  United States Federal Reserve use of repos  Under a repurchase agreement ("RP" or "repo"), the Federal Reserve (Fed) buys U.S. Treasury securities, U.S. agency securities, or mortgage-backed securities from a primary dealer who agrees to buy them back, typically within one to seven days; a reverse repo is the opposite. Thus the Fed describes these transactions from the counterparty's viewpoint rather than from their own viewpoint. U.S. Treasury securitiesagency securitiesmortgage-backed securitiesprimary dealerU.S. Treasury securitiesagency securitiesmortgage-backed securitiesprimary dealer

Jan. 4, 2011Financial Institutions & Markets Day 117 Reverse Repos  United States Federal Reserve use of repos  If the Federal Reserve is one of the transacting parties, the RP is called a "system repo", but if they are trading on behalf of a customer (e.g. a foreign central bank) it is called a "customer repo". Until 2003 the Fed did not use the term "reverse repo"—which it believed implied that it was borrowing money (counter to its charter)—but used the term "matched sale" instead.