Fed facility stabilizes after shrinking by $1.75 trillion
THE DRAWDOWN of balances at a key US Federal Reserve facility appears to have bottomed out for now, providing a liquidity cushion for the central bank’s reserves during tax season.
Use of the Fed’s overnight reverse repurchase agreement (RRP) facility — where counterparties like money-market funds park cash to earn 5.3% — has plummeted some $1.75 trillion since June. That’s when the government suspended the debt ceiling, unleashing trillions of dollars of Treasury bill supply and giving investors an alternative to just holding money at the Fed.
The funds in the facility began to stabilize in recent weeks, settling around $440 billion, close to the lowest level since 2021. Last month is when tax receipts began to ramp up, filling the government’s coffers and leading the Treasury to slash T-bill issuance. With more money to put to work than collateral available, eligible counterparties are shifting back to the Fed’s RRP.
The shifting dynamics may also give the central bank more time to decide when to slow and eventually stop the reduction of its balance sheet — a process known as quantitative tightening — because there will still be cash parked at the RRP even as tax payments drain a chunk of bank reserves.
The Fed started unwinding its balance sheet in June 2022 to remove excess liquidity from the system, amassed as part of the stimulus the Fed deployed during the pandemic. Draining that funds has sparked concern that the central bank will reach a level where reserves become too scarce, an outcome that could roil markets.
“This is good news, as we have been arguing that payments this tax season would be large on the whole,” John Velis, a foreign-exchange and macro strategist at Bank of New York Mellon Corp., wrote in a note to clients Tuesday. “If that were to happen this time around, and with bill supply restricted, we could see reserves become uncomfortably low. However, with RRP still holding steady above $400 billion, reserve scarcity might not become an issue this month.”
Bank of New York sees tax receipts totaling close to $600 billion in April, potentially draining about $500 billion of reserves.
That flow of money to the government will likely restrain T-bill supply in the coming weeks. Treasury is already on track to pay down about $184 billion of bills this month, well outside the $100-billion to $150-billion range of reductions the department forecast in January.
The Fed last month maintained the pace at which it’s reducing its bond holdings, even as Chair Jerome H. Powell said it will be appropriate to slow the unwind fairly soon. The release of minutes from the March Federal Open Market Committee is expected to include more details about officials’ discussion about the balance sheet. — Bloomberg
