Here I offer some thoughts on Bloomberg's account that the Fed has made inquiries with its dealers about the feasibility of a significant increase in the Fed's reverse repo operations.

First, a little background. The traditional tool of monetary policy is an open market purchase, in which the Fed purchased U.S. Treasury securities that had previously been held by someone in the private sector. The Fed would pay for those securities by crediting deposits in an account that the selling bank had with the Federal Reserve. These reserve deposits of banks represent claims that the bank could use, if it wished, to withdraw green currency from the Federal Reserve. The volume of reserve deposits historically was extremely important in determining the interest rate at which banks would lend the deposits to one another overnight. The traditional understanding of monetary policy was that the Fed would

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PIt's another Fed day today, with the FOMC's two-day policy meeting set to wrap up later and the results to be announced at roughly 2:15 eastern. Market betting is that the Fed will cut rates by 50 basis points to a record-low 0.5%. But one has to wonder if that really matters. The effective federal funds rate, determined by actual trading in the market, was just 18 basis points yesterday.brbrThe real question is how will the Fed further explain or define its new strategy of quantitative easing and flooding the banking system with reserves. Or as Bloomberg A href=http://www.bloomberg.com/apps/news?pid=20601087sid=aJOGrevCE.M4amp;refer=homeexplains things/A this morning ...brbrThe Federal Reserve may today reduce its main interest rate to the lowest level on record and prepare for one of the boldest experiments in its 94-year history: using its balance sheet as the key tool for monetary policy.brbrThe Fed’s Open Market Committee will probably cut the benchmark ...