Suppose the target range for the federal funds rate is 1.5 to 2 percent but that the equilibrium federal funds rate is currently 1.7 percent. Assume that the equilibrium federal funds rate falls (rises) by 1 percent for each $150 billion in repo (reverse repo) bond transactions the Fed undertakes. If the Fed wishes to lower the equilibrium federal funds rate to the bottom end of the target range, will it repo or reverse repo bonds to non-bank financial firms?

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Dryomys Dryomys · Answer 1 · 2019-10-11T12:44:42+02:00

Answer: $45 billion

Explanation:

Current equilibrium federal funds rate = 1.7 percent

Top end of target range = 2%

If Fed wants to achieve the top end of the target range of 2% then it must raises the equilibrium federal funds rate by 0.3%.

Reverse repo bond transactions leads to rise in equilibrium federal funds rate.

1% rise in equilibrium federal funds rate can be achieved through $150 billion in reverse repo bond transactions.

Therefore,

0.3% rise in equilibrium federal funds rate can be achieved through:

[tex]=\frac{150\times0.3}{1}[/tex]

= $45 billion

Hence,

Fed have to undertake $45 billion in reverse repo bond transactions.