MNI: Fed's Perli Expects Policy Rate To Remain Well-Controlled
MNI (WASHINGTON) - The official responsible for managing the Federal Reserve’s massive holdings of cash and bonds said Tuesday the most recent quarter-end saw elevated volatility that bears watching, but does not suggest anything other than abundant reserves in the financial system and room to run in shrinking the central bank balance sheet.
"There is considerable evidence that reserve supply remains abundant - quarter-end pressures do not appear to be induced by a scarcity of reserves," said System Open Market Account manager Roberto Perli in prepared remarks. The effective fed funds rate "has remained very stable relative to administered rates with no sign of upward pressure, even as Treasury repo rates have moved higher."
The most recent quarter-end saw a few days of elevated rates, with SOFR peaking roughly 21 basis points above its average in the prior week, Perli noted. "Although this may seem large, it is important to place this most recent quarter-end in the longer-run historical context."
FRICTIONS
Still, he said there is some evidence that intermediation frictions and tighter liquidity conditions are playing greater roles in repo market pricing of late, particularly
around financial reporting and Treasury settlement dates. "These frictions likely reflect a range of factors, including regulatory costs, counterparty credit limits, and other operational limits. These factors, combined with declining liquidity and increasing collateral supply, have likely contributed to the observed increase in repo rates around September quarter-end."
This suggests careful monitoring around quarter-ends, but "it does not on its own indicate that reserve supply is anything other than abundant" or that "repo intermediation is becoming prohibitively costly, or that money market conditions are at risk of becoming disorderly in the near term," Perli said in a speech to New York University.
The SOMA manager added it is neither surprising nor does it mean that the Standing Repo Facility is not effective. "The SRF is intended to provide a ceiling for EFFR, not for repo rates. I would therefore expect there to be sizeable fraction of repo trades occurring above the SRF rate, even if the facility works as intended," he said. (See: MNI: Fed's Standing Repo Facility Tested By Market Rate Spike)