Fed Minutes on Elevated Repo Rates
The Federal Reserve posted its "Minutes of the Federal Open Market Committee, December 9–10, 2025" on Tuesday, which tell us, "The manager noted that money market conditions continued to tighten over the intermeeting period and that the staff assessed that conditions were consistent with the level of reserves having declined to the ample region. Rates on Treasury repurchase agreements (repo) remained relatively elevated and volatile over the intermeeting period. Investors attributed firmness in repo rates to a decline in available liquidity and continued large Treasury debt issuance. Higher repo rates, along with a lower level of reserves, continued to contribute to upward pressure on the spread between the effective federal funds rate (EFFR) and the interest rate on reserve balances. The manager noted that the correlation between this spread and the level of reserve balances had risen notably over the past couple of months and that the EFFR had moved up faster than it had during the previous episode of balance sheet runoff. Consistent with elevated repo rates, usage of overnight reverse repo operations remained low, while both the frequency and volume of standing repo operations increased over the intermeeting period. Some other key indicators of reserve ampleness, such as the share of payments by banks occurring later in the day and the share of domestic banks borrowing in the federal funds market, also pointed to ample reserve conditions." The FOMC says, "Participants agreed that recent money market conditions pointed to reserves being within the ample range and that beginning RMPs would be prudent to maintain a supply of ample reserves. A couple of participants remarked that the recent increase in the spread between the EFFR and the interest rate on reserve balances had been faster than during the Federal Reserve's 2017–19 runoff experience, and a couple of participants observed that triparty repo rates had been averaging somewhat above the interest rate on reserve balances. Participants expressed their preferences for purchases to be in Treasury bills so that the SOMA portfolio composition would begin to shift toward that of Treasury securities outstanding, though no decision was made on the composition of the portfolio in the long run. Policymakers generally emphasized the importance of communicating that RMPs would be made solely to ensure interest rate control and smooth market functioning and had no implications for the stance of monetary policy." They add, "Conditions in U.S. short-term funding markets remained orderly but were generally tighter over the intermeeting period. In secured markets, liquidity conditions were tighter, on average, amid robust Treasury issuance, declining reserve balances in recent months, and month-end pressures.... In support of the Committee's goals and in light of the shift in the balance of risks, nine members agreed to lower the target range for the federal funds rate by 1/4 percentage point to 3 1/2 to 3 3/4 percent." Finally, they state, "At the conclusion of the discussion, the Committee voted to direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, for release at 2:00 p.m.: 'Effective December 11, 2025, the Federal Open Market Committee directs the Desk to: Undertake open market operations as necessary to maintain the federal funds rate in a target range of 3 1/2 to 3 3/4 percent. Conduct standing overnight repurchase agreement operations at a rate of 3.75 percent. Conduct standing overnight reverse repurchase agreement operations at an offering rate of 3.5 percent and with a per-counterparty limit of $160 billion per day. Increase the System Open Market Account holdings of securities through purchases of Treasury bills and, if needed, other Treasury securities with remaining maturities of 3 years or less to maintain an ample level of reserves. Roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities. Reinvest all principal payments from the Federal Reserve’s holdings of agency securities into Treasury bills.'"
