SPTL - Why Is Monetary Policy Focusing On The Overnight Lending Market?

• Reverse repurchase agreements remove funds from the overnight lending market, thereby preventing banks from using these funds to support a drawing down of reserves by marginal expansion of credit. Credit expansion may produce inflation.
• To the extent that accumulation of reserves prevents creation of new loans, the Fed hopes to establish a credible commitment to prevent inflation with its recent accumulation of reverse repurchase agreements.
• Why did the Fed accumulate reverse repurchase agreements instead of increasing the volume of deposits held at the Fed?

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