- Federal Reserve economists have floated the idea of a “standing repo facility” which would allow banks to exchange Treasurys for reserves.
- The idea would be to get banks to hold fewer reserves, and thus would help the Fed in its quest to shrink its balance sheet.
- There’s considerable support for the plan, but critics say it could represent more dangerous tinkering with financial markets.
Federal Reserve officials are considering a new program that would allow banks to exchange Treasurys for reserves, a move aimed at ensuring liquidity during difficult times that also would help the central bank decrease the size of its nearly $4 trillion balance sheet.
The so-called standing repo facility is in its early discussion phases. Respected St. Louis Fed economists David Andolfatto and Jane Ihrig have authored two papers on the plan, which they say would ease the regulatory burden for banks that feel pressured into holding ultra-safe assets.
In some quarters, the idea is viewed as a natural extension of current Fed policy. Others, though, think it in essence could be a repackaged form of quantitative easing and thus yet another iteration of the Fed’s decadelong tinkering in financial markets.
The idea comes as central bank policymakers look for ways to cut the bond holdings on its balance sheet without being disruptive to markets.