MNI: NY Fed Official Sees On RRP Usage Declining Over Time

The Federal Reserve anticipates take-up of its overnight reverse repo facility to decline over time as money market interest rates rise relative to the Fed's rate, the New York Fed's market chief pro tem Patricia Zobel said Thursday.

"Just as use of the ON RRP facility expanded as the balance sheet grew, shifts in money markets that accompany balance sheet runoff, along with incentives provided by administered rates, should result in ON RRP balances declining from currently elevated levels over time," said Zobel in a speech at the Cato Institute. "Over time, the increase in banks’ wholesale borrowing, along with more competitive deposit rates, should help draw funds out of the ON RRP facility."

This will necessitate significant adjustments across a wide range of private-sector balance sheets, she said, and the pace of these adjustments may occur at different rates across different institutions, depending on their responsiveness to changing conditions.

The markets chief pointed out that responses to the New York's Fed most recent Senior Financial Officer Survey are sending contradictory signals about whether banks' underlying demand for reserves has shifted.

"These dynamics suggest that maintaining ample conditions requires supplying reserves somewhat in excess of the aggregate amount that individual banks would want to hold on a typical day," she said.