New | US Fed confident on smooth lift-off of rates; ready for adjustments

The Federal Reserve is confident it can smoothly lift interest rates when the time comes, though it stands ready to make adjustments on the fly given uncertainty about how investors could react, the Fed official responsible for market operations said on Wednesday.

The New York Fed’s Simon Potter, who leads the team that will be responsible for hiking rates after more than six years at rock bottom, said questions remain over how much investors will use a new and lightly-tested tool meant to help the central bank tighten monetary policy.

The tool, an overnight reverse repurchase facility, or ON RRP, is meant to help mop up the trillions of dollars in excess reserves lingering in short-term markets after the financial crisis and years of subsequent Fed easing.

Potter warned against an over-reliance on ON RRP could lead to financial instabilities, and said months of testing has shown that the Fed probably will not need to make the facility unlimited in order to maintain control over short-term rates.

"Our testing programme gives us confidence that we have the necessary tools to enable a smooth liftoff," he told the Money Marketeers group of bond traders, adding the Fed aims to raise the cap on the repo facility to a level that the investors deem sufficient to ensure a smooth "liftoff."

The highly technical speech amounted to more confident talk from the central bank as it approaches a tightening likely later this year.