Fed’s Reverse Repo Facility Usage Sinks Below $300 Billion
(Bloomberg) -- The amount of money investors park at a major Federal Reserve facility dropped below $300 billion for the first time since 2021.
Sixty participants on Tuesday put a combined $292 billion at the Fed’s overnight reverse repurchase agreement facility, which is used by banks, government sponsored enterprises and money-market mutual funds to earn interest. It marks a steep decline from a record $2.554 trillion stashed on Dec. 30, 2022, according to New York Fed data.
Market participants are closely watching the pace at which the facility, known as the RRP, empties. Some on Wall Street warn the draining facility is evidence that excess liquidity has been removed from the financial system and bank reserve balances are less abundant than policymakers believe.
The central bank in June started shrinking its balance sheet at a slower pace, reducing the amount of Treasuries it lets roll off every month and therefore easing a potential strain on money-market rates.
JPMorgan strategists led by Teresa Ho said last month officials can keep shrinking the balance sheet through the end of the year, forecasting the amount at the RRP slightly below $300 billion and reserves at $3.1 trillion.
From the time the government suspended the debt ceiling in June 2023 until April of this year, demand for the Fed’s facility dropped by about $1.8 trillion, driven by a deluge of bill supply. At that point, Wall Street strategists expected the RRP to be completely emptied in the first half of 2024.
Instead, usage largely stabilized as bill issuance fell and uncertainty about the timing of interest-rate cuts kept cash parked at the RRP. But balances at the facility have been trending lower since the second half of July.
“The trajectory of RRP has shifted around quite significantly over the past year depending on bill supply and the pace of inflows into money market funds,” said Gennadiy Goldberg, head of US interest rate strategy at TD Securities. “At the old pace, it looked like RRP was on a mission to hit zero quickly, but then we saw usage stabilize before slipping more gradually now.”
