THE amount of money investors park at a major Federal Reserve facility dropped below US$200 billion for the first time since May 2021, reinvigorating debate over how long policymakers can remove cash from the US financial system without triggering a liquidity crunch.
Forty-one participants on Friday (Nov 1) put a combined US$155 billion at the Fed’s overnight reverse repurchase agreement facility, known as the RRP, which is used by banks, government-sponsored enterprises and money-market mutual funds to earn interest. It marks a steep decline from a record US$2.55 trillion stashed on Dec 30, 2022, according to New York Fed data. The number of counterparties was the smallest since June 2021.
The latest decline in usage comes as elevated funding rates lure cash away from the central bank. The facility offers a rate of 4.8 per cent, while funding rates traded at 4.93 per cent/4.92 per cent at one point on Friday.
“The decline in usage suggests that money-market investors are amply supplied with alternatives and see other products as more attractive compared with RRP,” said Gennadiy Goldberg, head of US interest rates strategy at TD Securities.
Market participants are watching the pace at which the facility’s remaining balances decline. Some on Wall Street warn a drop is evidence that excess liquidity has been removed from the financial system amid the Fed’s balance-sheet run-off, known as quantitative tightening. In June, the central bank started reducing the amount of Treasuries it lets roll off every month and therefore easing potential strain on money-market rates.
Dallas Fed president Lorie Logan said at the Securities Industry and Financial Markets Association’s annual meeting in October that it would be appropriate to operate with only “negligible balances” in the RRP. She also said some demand may be stickier as users value overnight assets or face counterparty credit limits for repo in the private market.
Logan also surmised if the remaining RRP balances do not evaporate as repo rates rise, then policymakers could alter the offering rate on the facility to incentivise participants to shift to private markets.
From the time the government suspended the debt ceiling in late June 2023 until early April this year, demand for the Fed’s facility dropped by nearly US$1.6 trillion as a deluge of bill supply syphoned cash from the market. While some on Wall Street predicted the RRP to be completely emptied in the first half, drainage has since slowed and somewhat stabilised.
The Fed, meanwhile, has continued unwinding its balance sheet. Chair Jerome Powell said in September he believes the central bank can run down its assets and lower rates at the same time. BLOOMBERG