Fed cuts reverse repo rate by 30 basis points
The Fed reverse repo rate is now 4.25%, which matches the bottom of the fed funds range
Analysts expect Fed to infuse cash from reverse repo facility
Dec 18 (Reuters) – The Federal Reserve adjusted a key part of its rate control toolkit on Wednesday, reducing the rate it pays on its reverse repo facility by more than a cut in the federal funds rate.
The Fed said the reverse repo rate will now rise to 4.25% from its prior level of 4.55%, reflecting an easing of 30 basis points, while it reduced the federal funds target rate range by a quarter percentage point to 4.25% and 4.5%. Has been interrupted. ,
Analysts believe the largely expected adjustment is a bid by the Fed to pull cash out of a facility that is widely seen as a proxy for excessive liquidity in the financial system.
The rate the Fed pays on its overnight reverse repo facility, or ONRPP, is available to money market funds and others to deposit cash at the central bank, effectively a collateralized loan to the Fed. The ONRP rate is designed to set a soft floor beneath all short-term rates.
The rate the Fed pays to lend cash to banks that take deposits increased to 4.4% from 4.65%. The two rates add together to keep the federal funds target rate range within the desired level.
The Fed has made technical changes to the ONRRP rate largely to ensure that it maintains firm control over the federal funds rate ceiling. However, this change could be more consequential as it is likely to make the reverse repo facility a less attractive place to park cash, prompting users of the instrument to pursue better returns in the private market.
The reverse repo facility has grown from negligible use in the spring of 2020 to a peak of $2.6 trillion at the end of 2022. It is shrinking as the Fed sheds bonds to reduce the size of its balance sheet, falling through 2022. From $9 trillion to the current $7 trillion, but the facility has appeared to be stabilizing in recent weeks.
This is not what some Fed policymakers want, as officials like Dallas Fed chief Lori Logan have noted that they expect the reverse repo balance to approach the zero level. Doing so would almost certainly mean that ongoing efforts to shrink the size of Fed holdings would begin to hurt bank reserves, marking the final step in the Fed dismantling pandemic-era levels of market support. .
There is still considerable uncertainty over the end game of the Fed’s balance sheet drawdown, with markets eyeing a May halving point. Drawing cash from the reverse repo facility should help make that forecast a reality, although market volatility at year’s end as well as government funding issues next year could complicate that process.
(Reporting by Michael S. Darby; Editing by Andrea Ricci)
