Investors brace for US Fed verdict on interest rates

There is a distinct chance US Federal Reserve officials will rewrite their strategy for normalising monetary policy this week given signs that a roller-coaster debate over a new tool for controlling interest rates is nearing its resolution.

Investors worldwide are watching the US central bank’s policy meeting that ends on Wednesday for hints on when it will start raising borrowing costs. But perhaps as importantly, officials may finally update a 2011 blueprint for a gradual tightening of the Fed’s ultra-loose policy and shrinking its swollen asset portfolio.

Many Fed officials, economists and financial market participants once believed the so-called overnight reverse repurchase facility, which has been tested for a year, would become the main lever for steering interest rates and play a central role in a new monetary policy framework.

However, after a long debate over the merits and potential risks of the new tool the Fed appears close to a compromise limiting the use of the facility, Fed and industry sources say.

In a reverse repo - a tool used by other central banks, but new for the Fed in such an unlimited capacity - the central bank offers Treasury securities in exchange for cash from banks, money market funds and mortgage finance agencies, effectively paying them to park funds with the Fed.