This week, the New York Federal Reserve announced the beginning of a new Reverse Repurchase Agreement Program to reduce some of the liquidity in financial markets. Under the program, the Fed will sell securities from it's portfolio -- but with an obligation to repurchase them at a later date.

For the first time since it began purchasing mortgage-backed securities, the Fed's holdings of federal agency MBS's passed the $1 trillion mark last week and now total $1.032 trillion. The Fed announced on November 25, 2008 that it would begin purchasing MBS's from housing-related government sponsored enterprises (Fannie Mae, Freddie Mac, Ginnie Mae, and the Federal Home Loan Banks), citing the need to:

The United States is not the first nation to face tough fiscal challenges. Other countries have faced similar fiscal challenges – and gotten out of them.

In a new paper ("Fiscal Turnarounds: International Success Stories"), CRFB’s Fiscal Roadmap Project looks at successful fiscal turnarounds around the world and possible lessons for the U.S.

What are the lessons?

Thomas Hoenig, President of the Federal Reserve Bank of Kansas City, had strong words today for lawmakers who want the Fed to bail them out of the fiscal mess they created: don’t come knocking at our door.

Earlier this week, four Fed lending facilities came to a close (see Fed release here), as previously announced, in light of improved conditions in financial markets. Among the expiring programs included the Commercial Paper Funding Facility, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Primary Dealer Credit Facility, and the Term Securities Lending Facility (links will direct you to a full description of each program at Stimulus.org).

The Federal Reserve announced, this morning, that it will transfer $46.1 billion in FY2009 profits over to the Treasury, higher than the $31.7 billion in 2008 profits (Thanks to Donald Marron for pointing this out). The Fed reported that the increase in profits was due largely to earnings on additional securities holdings.

How and when the Fed will unwind the massive amounts of liquidity it has provided to shore up the financial system and economy?  Will the Fed be able to manage the unprecedented unwinding skillfully so that they successfully manage to steer a course between overtightening (which could slow growth) and undertightening (which could fuel inflation)?

To answer these questions, the latest term of art to be added to our financial crisis lexicon is: “triparty reverse repo operations”.

A few hours before similar remarks were made by Fed Chairman Bernanke (see previous blog), his European counterpart, European Central Bank (ECB) head Trichet, had noted how important it is that European governments come up with "ambitious fiscal consolidation strategies in a timely manner":

On December 3rd, Federal Reserve Board Chairman Ben Bernanke appeared before the Senate Banking Committee for the hearing on his nomination to a second four year term as Fed chairman. As expected, the focus was on Fed actions in the economic and financial crisis and what the Fed’s role should be when the financial services regulatory structure is reformed. But Chairman Bernanke also made some important comments on US fiscal policy during the Q&A:

Today, the Fed released its latest Beige Book, with each Fed bank reporting on current economic conditions within its district. Reports from Fed district banks showed stabilization or small improvement in many sectors of the economy since the last report came out in September.