Wednesday, March 17, 2021

Does a Federal Reserve Counterparty Need More Funds From the Federal Reserve?

Federal Reserve Building, Washington D.C.

Ok, this gets a little technical.

The Federal Reserve currently maintains the Fed Funds rate in the range in the target of 0.0% to 0.25%.

To maintain this range, it does so via overnight reverse repurchase agreement operations. This is how the Fed maintains liquidity in the markets. Via these ON RRP operations, it can provide funds (or drain funds) from the system. 

The per-counterparty limit has been $30 billion per day (The counterparties are mostly banks and broker dealers).

The Fed just announced an increase to the counterparty limit which hasn't been changed since 2014.

Here is the Fed statement:

Statement to Revise Terms of Overnight Reverse Repurchase Agreements
March 17, 2021

The Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to conduct overnight reverse repurchase agreement (ON RRP) operations with a per-counterparty limit of $80 billion per day, effective March 18, 2021. The increase in the per-counterparty limit from the current level of $30 billion per day reflects the growth and evolution of U.S. dollar funding markets since the limit was last changed in 2014 and helps ensure that the ON RRP facility supports effective policy implementation. 

All other terms of ON RRP operations remain the same.

There is no way the Fed makes this change other than a counterparty (or counterparties) needs more than $30 billion per day or perhaps the Fed expects greater demand in the future for per day funding from the Fed.

Perhaps this has something to do with the expiration of the Supplemental Liquidity Ratio (Told you it is complicated).

Whatever the reason, the Fed has now decided to increase the amount of money it will shovel any one bank overnight by 167%, which is an additional $50 billion.


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