Fed policymakers judged ‘ample’ levels of reserves warranted bill-buying, minutes show

By Ann Saphir

Dec 30 (Reuters) – The Federal Reserve’s decision earlier this month to start buying short-dated government bonds came after a recommendation from staff to do so and a judgment by policymakers that the level of reserves had fallen to a targeted “ample” range, minutes of the central bank’s December 9-10 meeting showed on Tuesday. 

“Policymakers generally emphasized the importance of communicating that RMPs (reserve management purchases) would be made solely to ensure interest-rate control and smooth market functioning and had no implications for the stance of monetary policy,” the minutes said.

Fed Chair Jerome Powell used nearly the same wording to describe the operations during his post-meeting news conference on December 10, when the Fed cut its policy rate by a quarter of a percentage point. 

The technically oriented purchases were to commence on December 12 with an initial round totaling around $40 billion in Treasury bills, the Fed said at the time.

The move followed a decision at the Fed’s prior policy meeting to stop shrinking its balance sheet amid increasing signs that liquidity had tightened enough to potentially complicate the management of the central bank’s federal funds rate, its main tool to achieve its inflation and employment goals. 

At the December meeting, staff pointed to a range of indications, including tighter conditions in money markets, that reserves had fallen from previously abundant levels to the ample range, the minutes showed. Policymakers agreed, even as “various participants” noted that a more precise definition of ample would be helpful as the Fed tries to implement its ample-reserves rate-control framework amid shifting levels of demand for reserves. 

Some felt that an “ample” definition ought to focus on the level of money market rates compared to the rate paid on reserve balances, the minutes said. A couple worried that a definition that resulted in a larger-than-necessary supply of reserves could lead to excessive risk-taking among investors. The minutes did not reflect any consensus for a precise definition.

Staff told Fed policymakers it would be “prudent” to start reserve purchases soon at a “somewhat elevated pace” until late April when tax payments would put a particular drain on reserves, and then decrease the monthly pace thereafter. 

Policymakers “generally agreed” on the need for flexibility to adjust the size and timing of reserve purchases, the minutes said. 

(Reporting by Ann Saphir; Editing by Andrea Ricci)