Fed cuts key interest rates by 0.25%; reverse repo rate lowered to 4.25%
Dec 19, 2024
Analysts believe the largely expected adjustment is a bid by the Fed to nudge cash out of a facility that's widely viewed as a proxy for excessive liquidity in the financial system
The Federal Reserve adjusted a key part of its rate control toolkit on Wednesday, lowering the rate it offers on its reverse repo facility by more than it cut the federal funds rate.
The Fed said that the reverse repo rate will now stand at 4.25% from its prior level of 4.55%, marking a 30 basis point easing, while it lowered the federal funds target rate range by a quarter percentage point to between 4.25% and 4.5%.
Analysts believe the largely expected adjustment is a bid by the Fed to nudge cash out of a facility that's widely viewed as a proxy for excessive liquidity in the financial system.
The rate the Fed pays on its overnight reverse repo facility, or ONRPP, is available to money market funds and others to park cash at the central bank in what is effectively a collateralized loan to the Fed. The ONRPP rate is designed to set a soft floor underneath all short-term rates.
The rate the Fed pays deposit-taking banks to loan it cash moved to 4.4% from 4.65%. Both rates join together to keep the federal funds target rate range within desired levels.
The Fed has made technical tweaks to the ONRRP rate before largely to ensure it retains firm control over the federal funds rate range. This change, however, could be more consequential as it is likely to make the reverse repo facility a less attractive place to hold cash, in turn inducing users of the tool to chase better returns in the private market.
The reverse repo facility has moved from negligible usage in the spring of 2022 to a peak of $2.6 trillion at the end of 2022. It has been shrinking as the Fed has shed bonds to reduce the size of its balance sheet, which has fallen from 2022 peak of $9 trillion to the current $7 trillion, but over recent weeks the facility has appeared to stabilize.
That's not what some Fed policymakers want, as officials such as Dallas Fed chief Lorie Logan have noted they expect reverse repo balances to head to near zero levels. Doing so would almost certainly mean that ongoing efforts to shrink the size of Fed holdings would start eating into bank reserves, marking the final stage of extinguishing pandemic-era levels of Fed market support.
Considerable uncertainty still attends the endgame for the Fed's balance sheet drawdown, with markets eyeing a May stopping point. Flushing cash from the reverse repo facility should help make that forecast reality, although year-end market volatility as well as government financing issues next year could complicate that process.
[Reuters]
