Re: The Repo Market Time Bomb

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

William,
     You are confusing things.  I fully agree that the
"target" ("primary" if you prefer) is the fed funds
rate.  That's what they decide on at the FOMC
meetings.  As my friend at the Fed (who has been
there a very long time and is pretty high up) put it,
the fact that the Fed operates through the repo
market is a "technicality."  But the fact that they do
so means that what is most immediately and directly
affected by their actions is the repo rate.  The two rates
are linked and hence affecting means affecting the other.
     Henry C.K. Liu's characterization of the situation
remains accurate.
Barkley Rosser
-----Original Message-----
From: William F. Hummel <wfhummel@xxxxxxxxxxxx>
To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
Date: Saturday, April 10, 1999 12:59 PM
Subject: Re: The Repo Market Time Bomb


>Barkley Rosser wrote:
>
>>      A clarification of this is that the FOMC decides
>>on an fed funds rate that it wishes to hold.  But the
>>actual open market operations of Fed are carried
>>out in the repo market and have been for many years,
>>as described by Henry C.K. Liu.  Thus it is accurate
>>to say that what the Fed directly influences is the repo
>>rate and through it the fed funds rate, its intermediate
>>target.   The fact that Fed open market ops actually
>>are mostly in the repo market is not widely known and
>>not reported in most money and banking or macro
>>textbooks.
>>     BTW, I first learned of this many years ago from
>>a friend of mine at the Board of Governors.
>>Barkley Rosser
>
>This is simply wrong.  It is well-known that the Fed conducts its
>open market operations through repos to directly control the Fed
>funds rate, not the repo rate.  The private sector repo market is
>far too large for the Fed to have any _direct_ influence on.
>That market merely redistributes existing reserves but does not
>affect the total.  Only the Fed's OMO can affect the total and
>thus the balance of supply and demand for Fed funds.  The Fed
>funds rate is clearly the primary target, notwithstanding any
>misconception by a friend at the Board of Governors.
>
>William F. Hummel
>
>
>