The Federal Reserve has begun to experiment with a money-market operation, known as reverse repurchase agreements, which it may use as a tool to raise interest rates when that day comes.

But the operation carries major risk, says Sheila Bair, former chair of the FDIC and now head of the Systemic Risk Council.

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In reverse repos, the Fed "sells" securities from its balance sheet to financial institutions, agreeing to repurchase them the next day. The Fed pays a small interest rate on the overnight loan.

The operation helps boost interest rates by setting the floor for overnight rates at whatever rate the Fed pays on the repo.

"The mere existence of this facility could exacerbate liquidity runs during times of market stress," Bair writes in The Wall Street Journal. "Borrowers in the short-term debt markets will have to compete with it for investment dollars, and all, to varying degrees, will be viewed as higher risk than lending to the Fed."

MIT economist Simon Johnson criticizes the Fed for not taking strong enough action to reduce risk in the financial system.

"Senior Fed officials seem to have slipped back into their pre-2008 ways, ignoring concerns about dangerous financial-sector behavior, even when those concerns are expressed by members of the U.S. Senate Banking Committee," he writes on Project Syndicate.

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