By Michael S. Derby
NEW YORK (Reuters) -The official responsible for implementing monetary policy at the Federal Reserve Bank of New York said Wednesday that firms that need to use the central bank’s Standing Repo Facility should tap the tool when needed, adding that large-scale usage would not be problematic.
“It is desirable and fully expected that the [Standing Repo Facility] be used whenever it is economically sensible to do so,” said Roberto Perli, who manages the bank’s System Open Market Account, the Fed’s massive holding of bonds and cash.
“Our counterparties participated in large scale in the repo operations that the Federal Reserve offered in the past; if it makes economic sense, there is no reason why sizeable participation cannot take place” in the two daily Standing Repo Facility operations, Perli said.
Perli was addressing the performance of the SRF over recent days. At the Fed’s October policy meeting, in addition to an interest rate cut it announced a plan to stop the drawdown of its balance sheet at the start of December.
Since 2022 the Fed has been shedding bonds it bought during the pandemic in a bid to return what had been very substantial market liquidity levels to those that are tight enough to allow the Fed to retain firm control over the federal funds rate, the central bank’s chief lever to accomplish its monetary policy goals. The Fed also wants to allow normal levels of market volatility.
Ahead of the Fed meeting, rising money market rates, an upward drift of the federal funds rate within its range and usage of the SRF all signaled tightening market liquidity levels. The SRF allows eligible financial firms to turn bonds into cash quickly and act as a shock absorber for market liquidity needs. Adopted in 2021, the tool had until late mostly gone unused.
While usage in late October was notable, it was less than some had expected, and some Fed officials have acknowledged being flummoxed that more firms did not tap the SRF instead of borrowing from markets at higher rates than those offered by the Fed.
“Our market outreach suggests that some dealers may be unwilling to negotiate with money market funds, or divert funding to the SRF in large size, if repo pressures are moderate and only expected to last for short periods of time,” Perli noted.
SRF usage could rise as Wall Street becomes accustomed to using the tool, Perli said. “If repo pressure persisted, or intensified, I do expect that the SRF will be used more broadly and to a much larger extent, thus dampening the upward rate pressure.”
Perli echoed the views of New York Fed President John Williams, who said earlier in the day that having laid out a plan to stop shrinking Fed bond holdings, they will soon need to rise to accommodate growth in the financial system.
“The exact timing will depend on several factors, but, as President Williams said, given what we know today we probably won’t have to wait long,” Perli said.
(Reporting by Michael S. Derby; editing by Dan Burns)
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