Suppose the target range for the federal funds rate is 1.5 to 2.0 percent but that the equilibrium federal funds rate is currently 1.70 percent. Assume that the equilibrium federal funds rate falls by 1 percent for each $120 billion in repo bond transactions and rises by 1 percent for each $120 billion in reverse repo bond transactions the Fed undertakes. If the Fed wishes to raise the equilibrium federal funds rate up to the top end of the target range, will it repo or reverse repo bonds to non-bank financial firms? How much will it have to repo or reverse repo?

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Preston Cannon

13 May, 11:41

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Joe · Answer 1

Reverse repo bonds, (and. 3 x 120) = 36 billion. So, reverse repo 36 billion to move the rate to 2