By Michael S. Derby 

WASHINGTON -- Federal Reserve officials at their October policy meeting weighed but didn't settle on strategies that could provide a more enduring fix to the money-market interest-rate volatility that flared in September.

Minutes from the Oct. 29-30 meeting showed central bankers split on whether they should commit to continuing to add liquidity on a temporary basis via repurchase agreements, or repos, or whether they needed to adopt a bolder solution to ensure short-term rate markets remain calm.

The Fed already has committed to actions to calm markets through year-end. But the minutes showed officials looking ahead to other potential times of stress for money markets, like the April 2020 tax payment date.

Fed officials are trying to ensure that short-term rate volatility doesn't return. Just ahead of their September policy meeting, key short-term rates jumped, with the Fed's benchmark federal-funds rate rising above its target. That led the central bank to intervene with its first large-scale temporary market interventions in just over a decade, as it sought to ensure banks had enough liquidity to eliminate volatility.

Fed repo operations take in Treasury, agency and mortgage bonds from eligible banks in exchange for a de facto collateralized loan of cash to the banks. Repos have been a standard part of the Fed's tool kit for decades, but they had been out of use as the central bank navigated the financial crisis and its aftermath.

In early October, the Fed also said it would start expanding its balance sheet again via around $60 billion a month in Treasury bill purchases, hoping the addition of permanent liquidity would allow it to back away from large temporary interventions.

So far, the Fed's operations have kept short-term rates calm and the central bank's benchmark rate where officials want it to be. Fed officials hope to wind down the large repos in early January and are looking at a slowdown in the balance-sheet expansion by the middle of next year.

The minutes show that Fed staff presented central bankers with two approaches to manage short-term rates over the longer run.

The first entails the Fed pressing forward with modest-sized and regular temporary market interventions to add reserves to the financial system. The other would see the Fed adopt what many call a standing repo facility that "could serve as an automatic money market stabilizer."

Fed staff told officials more temporary operations would offer less precise control over short-term rates, but would come without other risks. Meanwhile, a new facility aimed at stabilizing rates would "likely provide substantial assurance of control over the federal funds rate, but use of the facility could become stigmatized, particularly if the rate was set at a relatively high level."

Fed officials have indicated the central bank's debate over the standing repo facility is moving slowly. St. Louis Fed leader James Bullard has urged its adoption, but others are less certain. Atlanta Fed leader Raphael Bostic in early November said if the Fed sets up a standing repo facility, he wants to see it used: "I really do want to make sure that we are thoughtful to make sure that the things that we put in the tool kit are things that will actually be used in bad times and in good times."

Fed officials said in the minutes keeping enough reserves in the financial system to achieve control over short-term rates is important. But some noted they could tolerate some variance in the central bank's target-rate range in times of expected market stress, as can happen around tax dates and Treasury debt auction settlements.

"Participants made no decisions at this meeting on the longer-run role of repo operations in the ample-reserves regime or on an approach for conducting repo operations over the longer term," the minutes said.

Officials "generally agreed that they should continue to monitor the market effects of the Federal Reserve's ongoing repo operations and Treasury bill purchases" as they seek a more enduring solution for keeping rates near desired levels.

The minutes also noted that in a videoconference on Oct. 4, all officials offered support for the Fed to expand its balance sheet via Treasury purchases. There was also unanimous support for committing to repo operations into January.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

November 20, 2019 15:58 ET (20:58 GMT)