This refinement may mean a reduction in the frequency of issues open to retail investors compared with the experimental period, but it will enable the allocation of a larger portion of the selected issues for allotment to them. It will also facilitate more focused retail marketing for the relevant issues. The second refinement is the enhancement of price attractiveness for the retail investors. Exchange Fund Notes open to retail investors will be allotted to successful non-competitive bids at the lowest price, i.e. the highest yield, accepted at the competitive-bid tenders, rather than the average accepted price (or average accepted yield). In other words, the retail investors will be assured of getting the best price that institutional bidders are able to get. I am sure retail investors will welcome this. The third refinement is the strengthening of the distribution network. The number of Retail Exchange Fund Notes Distributors will be increased from three to seven. The extensive branch networks of the Distributor Banks and their sophisticated telephone and Internet banking facilities will, I hope, make it much easier for retail investors to gain assess to the primary market for Exchange Fund Notes. The large retail banks have in the past been criticised for not supporting the development of the retail debt market for fear of losing their retail deposits. Just by looking at the names of the magnificent seven you will realise how wrong that criticism has been.
Removing a portion of the excess reserves from the system ahead of increasing the rate paid on reserves is a cautious approach, as it should improve the Fed’s control of short-term interest rates when it comes time to tighten monetary policy. 4 To be sure, even at today’s reserve levels, we would expect the interest rate paid on excess reserves to exert considerable pull on other short-term interest rates such as the federal funds rate or repo rates. However, we are unsure of the exact relationship between these rates and believe that it is likely to be tighter when the banking system is not as saturated with liquidity as it is today. Thus, it may be prudent to remove some portion of excess reserves before raising the interest rate on reserves. Note that the policy tightening in this scenario will still likely be taking place in an environment of large excess reserve balances, and the main workhorse of the tightening cycle will still be the interest paid on reserves. However, the draining tools can be used to best ensure the success of that framework. Market conditions: at risk on exit? Finally, let me turn to conditions in financial markets and discuss whether there may be vulnerabilities related to the Fed’s exit from the current monetary policy stance. I think there are two potential areas of concern. The first potential concern is that the exit strategy could simply cause confusion among market participants, prompting volatility in asset prices.