Fed Considers Adjusting Reverse Repo Facility Award Rate

According to Blockworks, the Federal Open Market Committee (FOMC) is contemplating a strategic adjustment to the Reverse Repo Facility (RRP) award rate, as revealed in the minutes of their November meeting. This potential move involves a reduction of 5 basis points, which would effectively lower the bottom range of the federal funds rate band. While the exact reasons for this consideration remain speculative, there is a prevailing theory that the FOMC aims to encourage outflows from the RRP and bolster bank reserves, thereby ensuring ample liquidity in the financial system.

The context for this potential adjustment is rooted in recent developments within the monetary system. At the end of the previous quarter, there was a notable increase in the uptake of the Standing Repo Facility. Additionally, FOMC members have expressed concerns about the sustainability of Quantitative Tightening (QT) without causing strain on the monetary plumbing system. By potentially lowering the RRP award rate, the FOMC might be attempting to preemptively address these concerns by making Treasury bills more attractive compared to the RRP, thus facilitating the movement of funds into the broader financial system.

Currently, there is approximately $186 billion in cash "stuck" in the RRP. By decreasing the award rate, the FOMC appears to be signaling its intention to redirect this money into the financial system to maintain liquidity levels. This consideration comes amidst ongoing QT efforts that are approaching a threshold which could potentially impact bank reserve levels. The upcoming FOMC meeting in December is anticipated to provide further clarity on whether this adjustment will be implemented. The acknowledgment of this potential dynamic by the FOMC underscores their growing concern about maintaining adequate bank reserve liquidity.

undefined