Thanks to Bear for the heads-up on this Bloomberg article which says that the Fed is beginning to lay the groundwork for executing its exit strategy from quantitative ease. One tool they will use is called a reverse repo. Instead of taking collateral from primary dealers (banks which participate in the Fed auctions, trade with the Fed as they execute monetary policy, etc…) and lending them cash the Fed will do the opposite. They will lend the primary dealers securities and drain cash from the system.
The Fed uses short-dated reverse repos as part of its day-to-day reserve management but is likely setting the stage for longer-term repos.
Once they begin to drain (which is not expected in the near-term), the dollar should get a boost. The fact that they are setting the stage for such an eventuality should be taken as a sign that that the Fed is well-aware of the inflation fears harbored by some market participants (and FOMC members, if Medley is to be believed) and is working to alleviate those concerns, to a degree.
Just as the Fed announced it would employ QE three months before it’s actual rollout, expect something like a quarter before they begin the exit strategy, if by some chance they were to signal such a shift at tomorrow’s FOMC meeting.
