Yellen Leaves Key Details of Exit Fed Plans a Mystery

        By Michael S. Derby
        WASHINGTON--What's hazier than the timing of the Federal Reserve's first interest-rate increase? Key details of some of tools and strategies it will use to help shepherd borrowing costs higher some day.
        In a news conference following Wednesday's Federal Open Market Committee meeting, Chairwoman Janet Yellen was asked about two important things: When the Fed will stop taking active steps to keep the size of its $4.5 trillion portfolio of bonds and cash steady, and how large a program designed to set a floor underneath short-term interest rates will be.
        Currently, the Fed takes money it gets from maturing bonds it owns and uses it to buy new securities to keep its holdings steady. This reinvestment process is ongoing despite the end of bigger efforts that saw the central bank buy Treasurys and mortgages to increase the Fed's balance sheet and provide stimulus to the economy.
        The end of this reinvestment process will cause the Fed's balance sheet to begin shrinking. It will also be a definite step toward boosting borrowing conditions. The central bank has said the reinvestment process will end some time after rate increases begin, but it has never defined the interval or mechanics of ending the reinvestments.
        The Fed also plans to support the interest-rate increase process with a program that takes in cash from eligible money funds and banks, known as reverse repurchase agreements. The rate offered for these de facto loans of money to the Fed is supposed to set a floor underneath short-term interest rates. The Fed intends these so-called reverse repos to be temporary, but very large at the start. How large no one quite knows.
        And after Ms. Yellen's news conference, answers remain elusive. Asked how large the first phase of the reverse repo effort might be in an actual cycle of raising rates, she replied the Fed "has an intention to make sure that they are available... in large quantity at liftoff to ensure that we have a smooth liftoff."
        Ms. Yellen said at the onset of the effort, "there will be an elevated level" of the reverse repos, but she added "it is our expectation and plan that fairly quickly after liftoff we will reduce the level" of these transactions.
        Right now, reverse repos tests are capped at $300 billion a day for one-day transactions, but some have speculated that cap will have to be much higher to achieve the control over interest rates Fed officials want. Lou Crandall, chief economist with Wrightson ICAP, said the Fed may need to provide more than $500 billion in reverse repos at the start, while noting that estimate can change depending on a number of different, complex factors.
        On the matter of ending the reinvestment process "the committee has really not made any further decision about how it is going to go about doing that," the Fed leader said.
        So when might the Fed fill in these critical gaps? It isn't clear. The Fed has time, given that a move to raise rates is unlikely to start until later in the year. As for how it might answer the questions, the Fed has been using meeting minutes released with a three-week lag after FOMC meetings to flesh out details of its strategy to raise rates. The June FOMC minutes might not answer the question, but the minutes for the July meeting and thereafter might.
        (END) Dow Jones Newswires

        June 17, 2015 17:26 ET (21:26 GMT)

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