Key US Policymaker Says Fed may Use Reverse-Repo as it Winds down Stimulus

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Key US Policymaker Says Fed may Use Reverse-Repo as it Winds down StimulusThe President of the Federal Reserve Bank of Atlanta Dennis Lockhart revealed that the central bank may rely on the reverse-repurchase program once it begins to tighten its monetary policy.

A reverse repo refers to a situation whereby the central bank loans securities for some time, briefly leading to lower liquidity in the banking system. Once the maturity date sets, the securities are taken back by the Fed, which gives back the cash. The Federal Reserve has been testing an overnight fixed-rate reverse repo program as it prepares for future phase-out of stimulus.

“I am confident reverse repos will be among our tool bag and will therefore may very well have a role in how we try to influence short-term interest rates,” Lockhart told press on Saturday in Dubai, according to Bloomberg.

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Lockhart, who won’t participate in policy voting this year, expects the Fed to begin hiking interest rates in the June-December half of next year and wind down its asset purchase program before the end of this year. The U.S. central bank is currently buying $45 billion worth of bonds monthly in order to boost economic growth and keep interest rates in check. The Fed reduced the monthly bond buys by $10 billion, its fourth consecutive month to do so.

The U.S. economy will probably grow by around 3 percent in 2014, possibly influencing the Fed to halt its bond buys in October or December, said Lockhart.

“With that improved growth picture, some of our resource slack, particularly both unemployment and underemployment, will be absorbed,” Lockhart added. “Conditions will develop by the middle of next year, at which time we can conceivably begin a gradual process of raising interest rates.”

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To contact the reporter of this story; Jonathan Millet at john@forexminute.com