NY Fed Blogs on FF, Standing Repo
The Federal Reserve Bank of New York posted two more briefs to its "Liberty Street Economics" blog recently. The first, "How the Fed Adjusts the Fed Funds Rate within Its Target Range," tells us, "At its June 2021 meeting, the FOMC maintained its target range for the fed funds rate at 0 to 25 basis points, while two of the Federal Reserve's administered rates -- interest on reserve balances and the overnight reverse repo (ON RRP) facility offering rate -- each were increased by 5 basis points. What do these two simultaneous decisions mean? In today's post, we look at 'technical adjustments' -- a tool the Fed can deploy to keep the FOMC's policy rate well within the target range and support smooth market functioning." The article adds, "As noted in the first post of this series, the FOMC chooses the target range for the fed funds rate to communicate the stance of monetary policy. The goal of monetary policy implementation is then to make sure that the effective federal funds rate (EFFR) remains in that range.... In the current framework, the Fed's main implementation tools are interest on the reserve balances (IORB) that banks hold overnight in their accounts at the Fed, and the rate offered at the ON RRP facility to a broad set counterparties including money market funds and government-sponsored enterprises." The second piece is entitled, "The Fed's Latest Tool: A Standing Repo Facility." It begins, "As noted in earlier posts in this series, under the Fed's current monetary policy implementation framework the supply of reserves is sufficiently large to ensure that the Fed's administered rates -- the interest on reserve balances (IORB) and overnight reverse repurchase agreement (ON RRP) rates -- influence the federal funds rate and other short-term interest rates. In July 2021, the Fed added to its implementation toolkit, announcing the establishment of a domestic standing repurchase agreement (repo) facility (SRF). The SRF serves as a backstop in money markets to support the effective implementation of monetary policy and smooth market functioning. It does so by limiting the potential for occasional pressures in overnight interest rates to push the effective federal funds rate (EFFR) above the FOMC's target range." The piece continues, "Through the SRF, the Fed offers overnight repos each day, effectively allowing counterparties to obtain funds from the Fed against U.S. Treasuries, agency debt, and agency mortgage-backed securities (MBS). Primary dealers are SRF counterparties, and, since the beginning of October, banks have been able to express interest in becoming SRF counterparties, with the first three banks added as SRF counterparties in mid-December.... The SRF is positioned as a backstop tool. As such, the facility's minimum bid rate should be set above rates in overnight repo markets under normal market conditions, so as not to unduly influence price discovery in short-term funding markets on most days, while still providing effective control of the fed funds rate. The SRF rate currently is set at 25 basis points, the top of the FOMC's target range."
