Bloomberg
While the Federal Reserve has said short-term interest rates are back under control following September’s upheaval, its solution may be having knock-on effects for money-market investors.
The amount of cash that was parked at the central bank’s facility for overnight reverse-repurchase agreements spiked to $27 billion. That’s the most since the end of the first half of 2019, when money-market funds and other counterparties pushed usage up to $44 billion. And although usage typically picks up around the 18th day of the month, this month’s increase is noticeably bigger.
The uptick suggests that the central bank’s recent endeavours to control short-term interest rates — such as Treasury-bill buying and repurchase-agreement offerings —may be displacing some investors. Money-market funds and others with cash to invest on a short-term basis typically put it to work by buying T-bills or lending in the repo market. But with the central bank now active on both of those fronts, the Fed’s reverse repo operations may be an attractive
alternative.
“Traditional front-end cash investors are getting crowded out by the Fed buying bills and offering repo,†said NatWest interest-rate strategist Blake Gwinn. “That’s why we’ve been on the lookout for an uptick†in usage of the reverse repo facility.
One potential effect of the uptick in reverse-repo facility usage is to drain reserves from the banking system, in effect acting as a headwind to efforts by the Fed to bolster reserves and stabilise short-end markets.
Of course the spike is, at this stage, a one-day phenomenon and comes just a day after usage of the facility fell to a record-low $2 million. It also coincides with a part of the month when issuers of government-sponsored enterprise debt such as Fannie Mae and Freddie Mac typically have additional cash on hand that they need to stash. To figure out if there is a longer-term impact, market observers will have to wait and see if these larger spikes happen more regularly.
‘Pursuing 2% inflation could distort markets’
Bloomberg
Federal Reserve Bank of Boston President Eric Rosengren warned his fellow monetary policy makers against putting financial stability at risk in pursuit of higher inflation.
“I don’t think there’s a big cost to being a little below 2%,†Rosengren told Bloomberg Television in an interview , referring to the central bank’s inflation target. “I’d rather be higher, but I wouldn’t want to distort financial markets to get that outcome.â€
The Fed cut interest rates last month for the third time this year to preserve a record-long US expansion and signalled that policy was now probably on hold if the economy stays on track. Rosengren dissented against all three cuts, preferring to keep policy unchanged. US growth has been dented this year by a weakening global economy.