Fed officers mentioned adjusting cash market assist in April, minutes present

By Jonnelle Marte

May 19 (Reuters) – The US Federal Reserve may need to adjust the instruments used to keep its policy rate within the intended range in the coming months if the cost of borrowing continues to fall overnight in the open market, such as an indicator the last central bank meeting signaled on Wednesday.

Policymakers also received a detailed briefing last month on the pros and cons of sustained support to money markets, according to the minutes.

The central bank began to intervene in the overnight lending markets in September 2019 when a lack of reserves led to a spike in short-term lending rates. However, for the past few weeks, the markets have been plagued by the opposite problem: too much cash.

Firms floating in excess reserves flock to the New York Fed facility to enter into reverse repurchase agreements or reverse repo contracts where they can temporarily park their money.

Money market funds and other eligible companies provided the Fed with $ 294 billion in cash overnight on Wednesday, up from around $ 100 billion at the time of the meeting and above levels at the start of the coronavirus pandemic in March 2020 had been achieved.

The Fed may consider adjusting managed rates “in the coming months” if downward pressure on overnight rates continues, Lorie Logan, manager of the System Open Market Account, told policy makers.

The central bank could respond by increasing the interest it pays banks on excess reserves (IOER) from 0.10% or adjusting the overnight reverse repo rate for non-banks, which is currently 0%.

MONETARY MARKET SUPPORT

In an in-depth discussion of the Fed’s efforts to strengthen money markets, policy makers also discussed the potential benefits and risks of having ongoing support from a permanent facility that financial firms can leverage when needed.

“Many participants” noted that a standing repo facility could provide the central bank with a way to automatically respond to market pressures, which can be difficult to predict. Still, a “pair” of participants said the Fed could save money by running repo operations at short notice when needed.

Policy makers previously discussed the durability of the agreement at the October 2019 meeting, but decided to wait and raised questions about what fees should be charged and which companies should be eligible. Some of these questions were also raised last month. (Reporting by Jonnelle Marte; Editing by Jonathan Oatis)