Fed officials discussed adjusting money market support in April, minutes show
(Reuters) – The US Federal Reserve in the coming months may need to adjust the tools used to keep its benchmark policy rate well within its expected range if overnight free market borrowing costs continue to decline , announced Wednesday the last meeting of the central bank. .
Policymakers also received a detailed briefing last month on the pros and cons of making the support they provide to money markets permanent, according to the minutes.
The central bank began intervening in overnight lending markets in September 2019, when a shortage of reserves caused short-term lending rates to skyrocket. But in recent weeks, markets have faced the opposite problem: too much liquidity.
Companies swimming in excess reserves flock to the New York Fed’s facility for reverse repurchase or reverse repurchase agreements, giving them a place to temporarily park their cash.
Money market funds and other qualifying firms placed $ 294 billion in cash with the Fed overnight Wednesday, down from around $ 100 billion at the time of the meeting and exceeding levels reached in early March 2020. of the coronavirus pandemic.
The Fed may consider adjusting administered rates “in the coming months” if downward pressure on overnight rates continues, Lorie Logan, manager of the system’s open market account, told policymakers.
The central bank could respond by increasing the interest it pays banks for excess reserves (IOER) by 0.10% or by adjusting the rate it pays on overnight repurchase agreements for non- banks, which is currently 0%.
MONETARY MARKET SUPPORT
In a detailed discussion of the Fed’s efforts to strengthen money markets, policymakers also reviewed the potential benefits and risks of making this support permanent through a permanent facility that financial firms can tap into as needed.
“Many participants” noted that a permanent repo facility could allow the central bank to automatically respond to market pressures, which can be difficult to predict. Still, a “couple” of participants said the Fed could save money by repoing on short notice if needed.
Policymakers previously discussed the sustainability of the deal at the October 2019 meeting, but decided to wait, wondering what rate to charge and which companies should be eligible. Some of these questions were also raised last month.
Report by Jonnelle Marte; edited by Jonathan Oatis