SAN FRANCISCO – Some Federal Reserve policymakers believe it may soon be time to lower the rate on funds that banks and money market funds park at the Fed, minutes from the Fed’s most recent meeting indicated, so that it once again matches the bottom of the range of the policy rate.
The so-called overnight reverse repurchase agreement rate, one of two technical lending rates the Fed uses to ensure the federal funds rate stays within its monetary policy target range, is currently set at 4.55%. Meanwhile, the policy rate range is 4.5% to 4.75%.
The overnight reverse repurchase agreement rate has ridden 5 basis points above the bottom of the Fed’s policy rate range since 2021, when the Fed adjusted it to firm up the “floor” of the policy rate range. The goal was to retain firm control of the federal funds rate – what banks charge each other for overnight lending – even as the Fed expanded its balance sheet.
The Fed is now two years into the process of trimming its balance sheet, and the reverse repo facility has fallen from a peak of $2.6 trillion at the end of 2022 to just under $150 billion this week.
Eliminating the 5 basis-point spread between the overnight reverse repurchase agreement rate and the bottom of the monetary policy rate would make the reverse repo facility — widely viewed as a proxy for excessive liquidity — marginally less appealing.
Some Fed officials at the November 6-7 meeting felt that “at a future meeting, there would be value in the (Federal Open Market) Committee considering a technical adjustment to the rate offered at the ON RRP facility” to bring it back down to equal the bottom of the policy rate range, according to the minutes.
Staff had provided an informational briefing on the possibility, which they concluded would “probably put some downward pressure on other money market rates,” the minutes said.
Citi analysts said that raising the idea in November suggests it could occur in December or January, and “would push more cash out of the reverse repo facility.”
