With the Fed’s reverse repo facility hitting a new all time high today, rising to a record $1.116 trillion among 82 counterparties…
… the manager of the Federal Reserve’s open market operations, Lorie Logan, was quoted in the FOMC minutes as saying that “market participants were beginning to focus on the potential effects of changes in the Treasury General Account at the Federal Reserve and Treasury bill issuance over coming months in connection with the debt ceiling.” She then said that “if a number of counterparties reached the per-counterparty limit on their ON RRP investments and downward pressure on overnight rates emerged, it may become appropriate to lift the limit.”
As a reminder, the current limit is $80 billion per counterparty (rev repo usage is focused among a handful of accounts), which was raised from $30 billion in mid-March. While the average use assuming the total facility usage currently is spread evenly across the 82 counterparties is a relatively benign $13.6 billion, the fact that the Fed is discussing this eventuality means that one or more major accounts are nearing the ceiling. Expect a more in depth discussion of this from Zoltan Pozsar later today.
Separately, there was also discussion among members about the standing repo facilities that the Fed established at the July 27-28 meeting to support the effective implementation of monetary policy and smooth market functioning. Here are the highlights from the minutes:
In general, participants viewed the facilities as important new tools
A few participants raised questions, including whether the proposed aggregate cap of $500 billion was necessary, whether the collateral eligible in SRF operations should be limited to Treasury securities only, and how the setting of the minimum bid rate in SRF operations would be expected to evolve over time relative to the primary credit rate and the interest on reserve balances rate
As Bloomberg notes, the two standing facilities – domestic and foreign – serve as backstops in money markets; counterparties for domestic operations will include primary dealers and will be expanded over time to include over time to include additional depository institutions
The committee voted unanimously to approve the establishment of the domestic facility
Bowman abstained from voting on the foreign facility, noting that she would have preferred that the liquidity arrangements accessible to foreign official institutions be maintained only during periods of extraordinary financial market stress
Participants anticipated that the committee would learn more about how these facilities operate over time and noted that it could adjust some parameters of the facilities on the basis of that experience
It’s worth noting that some analysts such as Barclays’ Joseph Abate, were surprised by the fact that the Fed had not created a facility right from the start with a wider range of counterparties that could help the market absorb sudden surges in repo activity.