[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

A DAY AT THE TRADING DESK
The Fed is able to affect the federal funds rate by controlling the supply of bank
reserves in the federal funds market, and it does so by using open market operations.
As we saw in Chapter 28, by entering the market directly to buy or sell government
securities, the Fed is able to increase or decrease the supply of bank reserves. More
specifically, these open market operations are conducted by the Trading Desk located
at the Federal Reserve Bank of New York. In a typical workday, Trading Desk personnel
gather information about reserve market conditions, evaluate this information
to assess the level of reserves required to keep the funds rate at the target value
set by the FOMC, and engage in actual open market operations to affect the supply
of reserves.
Around 7 A.M. every morning, the staff at the Trading Desk begins the process
of collecting information about financial developments. Information about factors that
may affect reserves arrives from other Federal Reserve banks and is used to develop
projections of reserve levels.
As the financial markets open in the United States, staff members talk with the
primary dealers on government security markets and with the managers of reserve
positions for the largest banks. These conversations provide the Trading Desk with
information about the likely demand and supply conditions in the federal funds
market. If the demand for reserves, at the current funds rate, exceeds the current
supply, the funds rate will rise unless the Trading Desk increases the supply. If the
supply of reserves at the current funds rate exceeds demand, the funds rate will fall
unless the Trading Desk acts to reduce supply.
Reserve conditions can also be affected by the net cash flow of the U.S. Treasury,
which has cash accounts with the Federal Reserve. If tax payments exceed government
expenditures on a particular day, there will be a net flow of funds into the
Treasury accounts at the Fed and a corresponding fall in funds held by the banking
sector. This decline in total reserves in the banking sector pushes up the funds rate
unless offsetting open market operations are undertaken. Treasury balances with
the Fed are fairly stable from year to year, but they can fluctuate greatly from day
to day. Once all this information is collected, the Trading Desk decides on its program
for open market operations. A conference call then takes place between the Trading
Desk, Federal Reserve Board staff in Washington, D.C., and one of the four presidents
of a regional Federal Reserve bank (other than New York) currently serving
as a voting member of the FOMC. This call, which lasts about fifteen minutes, reviews
the plans formulated by the Trading Desk and the information about financial conditions
on which it is based. Afterward, a member of the Federal Reserve Board
staff prepares a brief summary report that is distributed to all the governors and
reserve bank presidents.
The next step in the process is the actual execution of open market operations,
which takes place at between 9:20 A.M. and 9:40 A.M. (EST) each day; a die is used
to randomly choose the exact minute. The Trading Desk informs dealers of the
details of the operation. Is it buying or selling? How much? Does the sale or purchase
involve a repurchase (or resale) at a later date? (If the Trading Desk forecasts
a change in reserve conditions that is expected to be temporary, it uses what are
known as repurchases or RPs, transactions that involve, for example, a combined
716 ∂ CHAPTER 32 THE FEDERAL RESERVE AND INTEREST RATES