The Fed’s reverse repo volume hits a record high
© Reuters. FILE PHOTO: The Federal Reserve Board building is pictured in Washington, United States on March 19, 2019. REUTERS / Leah Millis
By Karen Pierog
(Reuters) – The amount of money flowing into the Federal Reserve’s reverse repurchase (RRP) facility hit an all-time high of $ 485 billion on Thursday, continuing to put pressure on short-term policy rates, which could fall below zero.
Cash-heavy financial institutions have been lending money to the central bank overnight at 0% interest rates in increasing amounts since March.
The market is grappling with an overabundance of cash in the system through the purchase of assets from the Fed and financial support from the US Treasury Department to the economy in response to the coronavirus pandemic, as well as the Treasury Department’s bankroll reduction, its cash store with the Fed, before the nation’s debt ceiling will come back into effect in late July.
The record amount accepted by the New York Fed for EIA operations on Thursday rose from $ 450 billion on Wednesday, surpassing an earlier high of $ 474.6 billion on December 31, 2015, according to TD Securities.
“This definitely increases the likelihood that the Fed will do something, that it will have to make additional changes to the counterparty limits for the reverse repo facility, potentially increase the interest rate on the facility, and obviously increase the IOER (interest on excess reserves), however we think this is probably the last resort, “said Aneta Markowska, chief economist at Jefferies (NYSE :).
The IOER, which is currently at 0.10%, together with the overnight repo rate, is helping the Fed to keep its key interest rate, the federal funds rate, within the target range.
“The US financial markets are currently flooded with liquidity,” wrote Bank of America (NYSE 🙂 analysts Mark Cabana and Olivia Lima in a research note on Wednesday, saying the abundance of cash comes from two sources: quantitative easing Fed and induced debt limits limit repayment of US Treasury cash balance by the end of July.
“The surge in liquidity will continue for months,” they wrote, noting that “limited relief was in sight”.
The US government conducts most of its day-to-day business through the TGA – administered by the New York Fed.
The Treasury Department spends money built up as it approaches the debt ceiling and refrains from issuing more debt. A decline in TGA leads to an increase in bank reserves, and banks that need funds to meet their reserve requirements often turn to the repo market.
TGA has dropped roughly $ 1 trillion since October to less than $ 800 billion.
The Fed launched its reverse repo program in 2013 to raise additional money in the repo market and to create a strict floor below market rates, especially the key rate. Eligible counterparties lend cash to the Fed overnight in exchange for treasury collateral.
At its March meeting, the Fed increased the amount business partners can lend from $ 30 billion to $ 80 billion.
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