(Bloomberg) — The amount of money investors park at a major Federal Reserve facility fell below $200 billion for the first time since May 2021, reviving the debate over how long policymakers can remove cash from the U.S. financial system without causing a liquidity crisis.
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Forty-one participants on Friday put a combined $155 billion into the Fed’s overnight reverse repurchase agreement known as the RRP, which is used by banks, government-sponsored companies and money market funds to earn interest. This marks a sharp decline from the record $2.55 trillion in storage on December 30, 2022, according to data from the New York Fed. The number of counterparties was the smallest since June 2021.
The latest drop in usage comes as higher financing rates take cash away from the central bank. The facility offers an interest rate of 4.8%, while financing rates were trading at 4.93%/4.92% at one point on Friday.
“The decline in usage suggests that money market investors are well supplied with alternatives and view other products as more attractive compared to RRP,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.
Market participants are looking at the rate at which the facility’s remaining balances will decline. Some on Wall Street warn that a decline is evidence that excess liquidity has been removed from the financial system as a result of the Fed’s balance sheet reduction, known as quantitative tightening. In June, the central bank began reducing the number of government bonds it matures each month, easing potential pressure on money market rates.
Dallas Fed President Lorie Logan said at the Securities Industry and Financial Markets Association’s annual meeting in October that it would be appropriate to operate with only “negligible balances” in the RRP. She also said demand may be more persistent as users appreciate overnight assets or face credit limits from private market repo counterparties.
Logan also surmised that if remaining RRP balances do not evaporate as the repo rate rises, policymakers could change the offer rate on the facility to incentivize participants to move to private markets.
From the time the government suspended the debt ceiling in late June 2023 until early April this year, demand for the Fed’s facility fell by nearly $1.6 trillion as a flood of notes took money out of the market. While some on Wall Street predicted that the list price would be completely deflated in the first half, the deflation has since slowed and stabilized somewhat.
