Fed Considers Lowering Reverse Repo Facility Rate to Boost Bank Reserves
In the FOMC November meeting minutes, a significant detail emerged unrelated to rate cut expectations. The Fed is contemplating reducing the award rate on Reverse Repo Facility assets by 5 basis points, potentially affecting the federal funds rate target range.
This reduction aims to encourage outflows from the RRP and increase bank reserves, ensuring sufficient liquidity in the financial system. Recent activity in the Standing Repo Facility suggests urgency due to the limits of quantitative tightening (QT) and potential strains on the monetary system.
A comparison between the $1 million T-bill and the RRP award rate indicates that money market funds shift between these options based on yield attractiveness. Lowering the award rate may make T-bills more appealing:
Currently, $186 billion remains in the RRP, indicating a need for this capital to flow into the broader financial system to maintain liquidity amid QT’s progression towards critical levels that could challenge bank reserves:
The upcoming December FOMC meeting will clarify whether this strategy will be implemented. Acknowledgment of this potential adjustment indicates increasing concern within the FOMC regarding bank reserve liquidity levels.