WSJ on Fed Hike Mechanics
The Wall Street Journal writes, "When the Fed Raises Rates, These Traders Make It Happen." The article explains, "Officials on the trading desk at the Federal Reserve Bank of New York, which implements changes in rate policy, have spent more than three years tinkering with their tool kit for lifting borrowing costs. Last December, when they raised the policy rate for the first time since 2006, their tools worked smoothly." It adds, "To raise rates, traders in the New York Fed markets division perform a series of maneuvers designed to lift the policy rate into the target range.... When the implementation day arrives, the Fed will pay higher rates on the money banks park in their accounts at the central bank, called reserves. Currently, the Fed pays 0.5% on reserves. After the next increase, it is likely to pay 0.75%. That afternoon, the Fed will lift the rate it pays on trades called reverse repurchase agreements, or reverse repos. In these, the central bank borrows from money-market funds and others in exchange for Treasurys. A countdown clock appears when FedTrade opens for repos at 12:45 p.m. EST, which changes to yellow and then to red as the operation completes, generally by 1:15 p.m. Currently, the Fed pays 0.25% on reverse repos. After the next increase, it is likely to pay 0.5%. As a result of these moves, the fed-funds rate is supposed to float between the 0.5% repo rate and the 0.75% rate on bank reserves."
