— This is the script of CNBC's news report for China's CCTV on May 28, Wednesday.
Welcome to the CNBC Business Daily.
The U.S. Federal Reserve has started talks on how it will raise short term interest rates.
This as a number of investors are expecting the Fed to wind down its bond-buying program in Q4.
But as speculation flies over how the Federal Reserve plans to exit its quantitative easing…
CNBC's Steve Liesman took a look at the tools the Fed has at its disposal.
We're going to take a look inside the Federal Reserve's toolbox. Many of these facilities and programmes are currently being tested. Why? Because the Fed, some time next year, plans to normalize interest rates. But it has a problem. Quantative Easing put $4.1 trillion of excess reserve out there and the issue now is how does the fed control that money when it wants to control interest rates. The Fed's main tool was the Fed's fund rate and that may be something that's problematic now to keep because all this money can come sloshing in and out of the Fed's fund market. So, there are basically a set of tools the Fed is designing right now in order to control that flow of money. One of those, one of the bigger ones is probably going to be reverse repos. The fed will sell collateral at least overnight and soak up cash. Could be a long return on some of these - maybe as long as 7 days. That programme currently being tested. Another one is called the term deposit facility. It's a big crowbar here. With that, it would be like a big certificate deposited to Fed. You put your money on the Fed's bank accounts for a period of a week or 30 days and the Fed will give you an interest rate just like a CD. What else does the Fed have? Interest on excess reserves. This'll be a main tool - which is why it's a pretty big axe right here - where the Fed basically just pays interest on those excess reserves in an effort to really counter the motivation for banks to lend that money out. And of course, a big and interesting one would be the balance sheet. The Fed could sell assets outright which would eliminate those assets and then esentially, which would eliminate the cash from those assets. Now, we don't know any combination that we're going to have of all these different tools here - which one it'll be. It could be that there's a term deposit facility that's really big like a crowbar or could be a term deposit facility that's kind of small like this. All these being tested right now and we won't really know the answer till next year when the fed starts to put these in play and try to control the fed funds rate as it tries to normalize interest rate. Back to you.
Fed Chair Janet Yellen rattled investors when she spoke in March about a rate increase happening possibly six months after the end of QE.
Speculations have risen since.. on the timeline for this monetary tighterning.
That wraps up this edition of the Business Daily.
I'm Sri Jegarajah, reporting from CNBC's Asian headquarters.
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