U.S. Markets

Demand surges for New York Fed's reverse repo facility

FILE PHOTO: People walk wearing masks outside The Federal Reserve Bank of New York in New York City, U.S., March 18, 2020. REUTERS/Lucas Jackson

(Reuters) - Financial firms swimming in reserves are parking more of their cash overnight at the New York Federal Reserve’s reverse repo facility.

Usage of the reverse repurchase facility, which gives firms somewhere to temporarily place their cash in exchange for a small return, surged in recent days. Firms stored $142 billion overnight with the facility on Tuesday and $101 billion on Monday, the largest operations since roughly a year ago.

The higher demand for the facility, which typically sees little take-up, is increasing speculation that the Fed may need to make some technical adjustments soon to keep short-term rates from falling too low.

“The problem of excess front-end cash is only going to worsen over the next few months,” John Canavan, lead analyst for Oxford Economics wrote in a research note on Wednesday.

Short-term interest rates are drifting lower in part because of the Fed’s $120 billion in monthly bond purchases, a surge in bank reserves and a drop in the government’s cash stockpile as it pays out pandemic relief payments and tax refunds.

The Fed’s options include adjusting the Fed’s overnight reverse repo rate for non-banks, which is currently at 0%, or raising the interest it pays banks for excess reserves (IOER) from 0.10%.

But some analysts, including Canavan, say the Fed may not necessarily act at this week’s meeting. The central bank has historically only made such technical adjustments, when the effective federal funds rate is within 5 basis points of the top or bottom of the target range, which is currently 0-0.25%. The Fed funds rate has held steady at 0.07% since mid-February, except for a temporary dip to 0.06% at the end of March.

With the tool working “for the time being,” the Fed could also choose to keep such adjustments separate from monetary policy decisions, Ian Lyngen and Ben Jeffery of BMO Capital Markets wrote in an emailed note on Tuesday.

Reporting by Jonnelle Marte; Editing by Alistair Bell