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FED: December Meeting To Bring Likely Downward Adjustment To ON RRP Rate

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At next week's FOMC meeting, there is a good chance that the offering rate on standing overnight reverse repurchase operations (ON RRP) will be lowered by 5bp more than the Fed funds rate. This rate is currently set at 5bp over the lower bound of the Funds rate. So if the Fed cuts rates by 25bp as expected to 4.25-4.50%, the ON RRP rate should be set at 4.25% (from 4.55% currently), aligning it with the lower funds rate bound.

  • Such a technical adjustment was essentially off the radar until it was mentioned as a possibility in the November meeting minutes: “Some participants remarked that, at a future meeting, there would be value in the Committee considering a technical adjustment to the rate offered at the ON RRP facility to set the rate equal to the bottom of the target range for the federal funds rate, thereby bringing the rate back into an alignment that had existed when the facility was established as a monetary policy tool.”
  • The key factor considered by the FOMC  is that "lowering the ON RRP offering rate 5 basis points would align the ON RRP offering rate with the bottom of the target range for the federal funds rate and would probably put some downward pressure on other money market rates." It could also reduce usage of the ON RRP facility (which in any case has seen takeup fall to close to $150B, vs $700+B at the start of the year), potentially helping reserves remain ample for a little longer.
  • While an adjustment is now the consensus expectation, it's unclear how much it is priced in. If the 5bp downward adjustment is made, it would be expected to have a downward impact on a broader money market rates including the effective Fed funds rate, which has been printing consistently at 8bp above the lower bound (so 4.58% currently).
  • If markets currently put 100% chance of this move, for example, and a large amount of the move (eg 80% passthrough = 4bp) passes through to EFFR, then markets may actually currently be pricing less than 96% of a 25bp Funds cut (24bp in OIS and FF). Likewise if an ON RRP move is postponed to a later meeting, for example March vs January, that could impact the interpretation for implied cut pricing for early next year.
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At next week's FOMC meeting, there is a good chance that the offering rate on standing overnight reverse repurchase operations (ON RRP) will be lowered by 5bp more than the Fed funds rate. This rate is currently set at 5bp over the lower bound of the Funds rate. So if the Fed cuts rates by 25bp as expected to 4.25-4.50%, the ON RRP rate should be set at 4.25% (from 4.55% currently), aligning it with the lower funds rate bound.

  • Such a technical adjustment was essentially off the radar until it was mentioned as a possibility in the November meeting minutes: “Some participants remarked that, at a future meeting, there would be value in the Committee considering a technical adjustment to the rate offered at the ON RRP facility to set the rate equal to the bottom of the target range for the federal funds rate, thereby bringing the rate back into an alignment that had existed when the facility was established as a monetary policy tool.”
  • The key factor considered by the FOMC  is that "lowering the ON RRP offering rate 5 basis points would align the ON RRP offering rate with the bottom of the target range for the federal funds rate and would probably put some downward pressure on other money market rates." It could also reduce usage of the ON RRP facility (which in any case has seen takeup fall to close to $150B, vs $700+B at the start of the year), potentially helping reserves remain ample for a little longer.
  • While an adjustment is now the consensus expectation, it's unclear how much it is priced in. If the 5bp downward adjustment is made, it would be expected to have a downward impact on a broader money market rates including the effective Fed funds rate, which has been printing consistently at 8bp above the lower bound (so 4.58% currently).
  • If markets currently put 100% chance of this move, for example, and a large amount of the move (eg 80% passthrough = 4bp) passes through to EFFR, then markets may actually currently be pricing less than 96% of a 25bp Funds cut (24bp in OIS and FF). Likewise if an ON RRP move is postponed to a later meeting, for example March vs January, that could impact the interpretation for implied cut pricing for early next year.