FOMC Minutes Discuss RRP, MMFs
The latest "Minutes of the Federal Open Market Committee for the meeting dated March 19–20, 2024 tell us, "Conditions in U.S. money markets had been stable over the intermeeting period, with less upward pressure on repurchase agreement (repo) rates than in recent intermeeting periods. The usage of the overnight reverse repurchase agreement (ON RRP) facility had continued to decline, albeit at a somewhat slower pace than that seen over the second half of 2023. Staff projections suggested that total ON RRP balances might stabilize in coming months at either zero or a low level. This assessment was also supported by information acquired in Desk outreach efforts." The Minutes state, "The manager provided an update on indicators of reserve conditions. Over the past few years, rate control had been effective, with the effective federal funds rate being firmly within the Committee's target range. The staff assessed that, over the intermeeting period, the federal funds rate continued to be insensitive to day-to-day changes in the supply of reserves. This outcome, together with various other indicators of reserve conditions, supported the conclusion that reserves remained abundant. The manager noted that there was nevertheless significant uncertainty about the demand for reserves and that, under the current pace of runoff of the Federal Reserve's securities portfolio, stabilization in total ON RRP balances would, all else equal, cause reserves to start declining at a rapid rate." They comment, "Some participants also mentioned the importance of both the discount window and the standing repo facility as liquidity backstops as reserves decline. Many participants commented on aspects of the composition of the Federal Reserve's securities holdings, including the appropriate longer-run maturity composition of the System Open Market Account portfolio and options to achieve in the longer run a portfolio that consists primarily of Treasury securities." The Minutes also say, "Over the intermeeting period, the market-implied path for the federal funds rate through 2024 increased markedly, reversing the declines that had occurred since late last year. Consistent with the increase in the implied policy rate path, intermediate- and longer-term Treasury yields moved up over the period, with larger increases concentrated at shorter maturities. Most of the increase in short-term Treasury yields was attributed to a rise in near-term inflation compensation. Market-based measures of near-term interest rate uncertainty for shorter-term yields remained elevated by historical standards, in part reflecting investors’ continued uncertainty about the path of policy rates." They add, "Conditions in U.S. short-term funding markets remained stable over the intermeeting period. Usage of the ON RRP facility continued to decline. However, the decline in average take-up was less than in the two previous periods, suggesting that the rate of decline could be slowing. The continuing decline in ON RRP take-up primarily reflected money market funds' (MMFs) ongoing reallocation of assets to Treasury bills amid continued bill issuance and relatively attractive bill yields. Banks' total deposit levels edged up further in January and February, likely reflecting, in part, rising nominal income and somewhat more competitive deposit rates. MMFs continued to provide relatively attractive yields to investors and experienced modest inflows since the January FOMC meeting."
