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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: N who wrote (1176)	1/24/1999 5:57:00 PM
From: Henry Volquardsen	Read Replies (2) \| Respond to of 3536

Chip, Nancy I have to admit that I don't remember the Fed draining liquidity on Friday and I was trading bonds actively. I'll check tomorrow to see what happened. Also the bond market rallied on Friday so the market didn't respond as if this was a policy signal, which is why I probably didn't notice. For the moment I'll assume it was just a technical move. But I'll try and answer a few questions. Chip you mention a few dates and say you were told that such a drain was rare. Well the Fed is always managing liquidity and drains or adds liquidity quite regularly. These are technical adjustments and often have no policy implications. Think of it as cash flow management. One such technical situation occurs every year in the second quarter. As individuals and companies make tax payments it temporarily drains liquidity from the system. This will give the Fed a seasonal bias towards needing to add liquidity during this period. There are other such factors that occur throughout the year and most of the Fed's activity is designed towards managing this liquidity. There will however be times that the decision to drain or add has policy implications. The Fed will be trying to speed up or slow down the rate of monetary growth. The Volcker Fed used this tool in the early 80s. It is a very blunt tool and not one the Fed uses actively at the moment. And if they were using it it would be tough to recognize at the time as the only evidence that they were doing this would be when money supply numbers came out. But, as I said before, the Fed does not use this tool that often. What your friend may have been referring to is the tool that they used, it may be something the Fed doesn't do often. This gets into Nancy's question. First off repos with a foreign institution is the same as a domestic one and would have no real policy implications, the money finds its way in and out of the system in the same way. There are basically two ways the Fed can drain or add reserves. Outright sales/purchases of securites or repos. The only difference from the Fed's point of view is how long they believe the extra liquidity will need to be added or drained. Repo is used if it is a temporary need, a few days or a week. This is the tool they use most frequently. If the Fed believes the adjustment is required for a longer period they will buy or sell securities. But to answer Nancy's final question, draining or adding liquidity is usually technical. The Fed's main tool for managing monetary conditions is interest rate levels. That and the some times not to subtle message that Fed officials deliver in various speaking engagements. At the moment they appear on hold. Henry