As I discussed briefly yesterday, Treasury has announced plans to revitalize its Supplementary Financing Program (SFP), which will effectively mop up $200 billion in excess reserves over the next two months. Even though this is a Treasury action, it strikes me as an important step (with many yet to come) in the Fed’s exit strategy.

The boost in the SFP has created some confusion among observers, however, because of the limited information that Treasury and the Fed have provided about the rationale for the move. Indeed, as one reader pointed out to me, Ben Bernanke makes no mention of the SFP in his prepared testimony today. (Anyone know if he was asked about it in Q&A?)

Over at Econbrowser, Jim Hamilton provides an excellent summary of the SFP and the possible implications of its rebirth. He concluding thoughts:

Still, one is led to wonder whether there might be a connection between today’s announcement about the SFP and last week’s announcement of an increase in the Fed’s discount rate. Numerous Fed officials encouraged us to interpret the latter as a routine and technical management tool. Are the discount hike and SFP renewal separate and purely technical developments, or is something more involved?

If you are interested in these issues, I encourage you to read his entire post.

Read the post here