Logan Says NY Fed to Expand RRP
Federal Reserve Bank of New York Executive Vice President Lorie Logan spoke Thursday at the Annual Primary Dealer Meeting on "Desk Operations: The New Normal." In a section on "Money Markets: The New Normal," she explained, "Many of the extraordinary measures taken to address dysfunction in dollar funding markets associated with the pandemic have also gradually wound down. The Desk's remaining term repo operations were phased out in February, the frequency of some central bank swap line operations was reduced last summer, and the lending authority of the 13(3) funding facilities related to money markets has expired. Nonetheless, the FOMC's ongoing asset purchases continue to lift bank reserves to new highs, and an environment of elevated reserves is likely to be the new normal for an extended period. Fortunately, the Federal Reserve's ample reserves framework is well-suited for managing short-term interest rates in environments associated with a wide range of reserve levels.... Most recently, the growth in reserves has contributed to a decline in overnight rates relative to interest on excess reserves (IOER). The effective federal funds rate and other overnight unsecured rates have softened modestly, while we have observed more pronounced downward pressure on overnight repo rates. The large size of secured market investors, such as government money market funds (MMFs) and government sponsored enterprises, combined with recent reductions in the investments available for these investors, such as Treasury bills, have put particular downward pressure on repo and bill rates." Logan continued, "In this environment, the overnight reverse repo (ON RRP) facility is likely to become an increasingly important element of our operating framework. The ON RRP facility helps place a floor on overnight rates by offering a broad range of money market investors an alternative risk-free investment option. The availability of this facility is especially important because nonbanks represent a substantial proportion of the U.S. financial system and money markets, but do not have access to interest-bearing reserves at the Federal Reserve. Additionally, the facility can alleviate downward pressure on money market rates associated with reserve growth by broadening the liabilities that support balance sheet expansion. The ON RRP has historically been an effective floor for the federal funds rate and has also supported other short-term interest rates, and we expect it will continue to do so in the future." She told the virtual event, "As a measure of prudent planning, the Desk recently conducted a review of key design features of the ON RRP to ensure that the facility supports effective policy implementation. Notably, assets under management at government MMFs -- a major group of money market investors -- have increased significantly and become more concentrated at the largest funds since the facility's $30 billion per-counterparty limit was set in 2014. In light of these changes, the FOMC recently increased the per-counterparty limit on ON RRP usage to $80 billion which restores the capacity of the facility relative to the assets under management at our MMF counterparties to roughly the level that existed when the $30 billion limit was established. Staff also reviewed access to the facility and concluded that the existing counterparty types are still representative of the universe of repo market investors. However, the review also presented an opportunity to consider potential adjustments in line with the New York Fed's broader efforts to ensure that our counterparty policies promote a fair and competitive marketplace.... Expanding counterparty eligibility can reduce barriers to entry and foster inclusivity by potentially making our operations accessible to smaller firms. A more vibrant and diverse marketplace could, in turn, strengthen the effectiveness of monetary policy implementation tools. In this regard, we expect in coming months to reduce the size and activity thresholds for ON RRP counterparty eligibility, which will help achieve these goals." Logan added, "This is part of the Federal Reserve's ongoing commitment to support diversity, inclusion, and opportunity, following the expanded counterparty access for certain 13(3) facilities and agency CMBS operations. Relaxing eligibility criteria helps bring a diverse set of firms by size, business model, and ownership into our counterparty base, and we look forward to leveraging these new business relationships to also broaden our market intelligence efforts. As a final note on money markets, in addition to ensuring that the ON RRP's terms continue to support effective policy implementation, the Federal Reserve may consider adjusting administered rates if undue downward pressure on overnight rates emerges, as noted in the minutes of the March FOMC meeting released yesterday. The Federal Reserve has adjusted administered rates within the target range on numerous occasions in recent years as conditions in overnight markets have changed. Such adjustments are purely technical steps to support effective policy implementation and to maintain the federal funds rate well within the target range."
