Fed confident in smooth US rate hike despite uncertainty about how investors will react

PUBLISHED ON APR 16, 2015 7:47 AM

NEW YORK (Reuters) - 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.