I would like to explore an alternative central bank policy regime that involves no daylight credit at all. Under this regime, the Fed would automatically “sweep” the overnight excess reserve balances of banks into reverse repurchase agreements. Specifically, at the close of Fedwire ( 6:30 p.m.) we would sell them U.S. Treasury securities in exchange for all of their excess reserve balance. At the opening of Fedwire on “the following day” (actually 9:00 p.m. the same night) the transaction would be reversed; we would buy back the securities and credit their account for the purchase amount, plus interest. Upon initiation of the service, the Fed would conduct a large one-time open market purchase of securities during the day to start the program up with abundant daylight reserves. If the interest rate were set close to or at the target fed funds rate, this scheme would allow us to curtail daylight credit without imposing much cost on banks. For every dollar of daylight credit we withdraw, we could supply an additional dollar of daylight reserves via the initial open market purchase.
