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MNI: Fed To Press Ahead With QT Amid Liquidity Concerns

(MNI) WASHINGTON

Record usage of overnight reverse repos is amplifying the effect of Fed QT in draining cash from the banking system.

Record investment in the Federal Reserve’s reverse repo facility is amplifying the effect of quantitative tightening in draining cash from the banking system and renewing concerns over Treasury market functioning, but the threat of dwindling reserves is unlikely to derail Fed QT, current and former senior Fed staffers told MNI.

The Fed calculates that market mechanisms will automatically shrink RRP demand over time. Regulators are also preparing a recalibration of bank capital requirements this fall expected to include a modification to the supplementary leverage ratio, making holding reserves more attractive to big banks.

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Record investment in the Federal Reserve’s reverse repo facility is amplifying the effect of quantitative tightening in draining cash from the banking system and renewing concerns over Treasury market functioning, but the threat of dwindling reserves is unlikely to derail Fed QT, current and former senior Fed staffers told MNI.

The Fed calculates that market mechanisms will automatically shrink RRP demand over time. Regulators are also preparing a recalibration of bank capital requirements this fall expected to include a modification to the supplementary leverage ratio, making holding reserves more attractive to big banks.

Keep reading...Show less