MNI: Fed's Perli Lays Out Plan For Tracking Reserves Abundance

The Federal Reserve plans to monitor a range of sources for signals that the supply of bank reserves are approaching "ample" levels, at which point it will stop QT altogether, Roberto Perli, who oversees New York Fed's massive holdings of securities and cash, said Wednesday.

The aggregate level of reserves consistent with "ample" is uncertain and can change over time, he said, and "it is sensible to approach that unknown level carefully." The Fed said last week it would slow QT by about half starting in June to allow runoffs to continue for longer and minimize the risk of market turbulence.

One indicator of potential reserve scarcity is the spread between the effective fed funds rate and the interest rate on reserve balances, currently at -7 basis points. "If or when it starts becoming less negative in the future, it could provide an important clue that reserves may be becoming progressively less abundant," Perli said.

The Fed bank will also track the elasticity of the fed funds rate to short-term shocks to reserve supply, currently at around zero, he said.

SIGNS OF STRAIN

Other indicators that can shed light on current reserve demand and provide an early signal of reserve scarcity include: total amount of fed funds borrowing by domestic banks, the timing of interbank payments, the amount of daylight overdrafts, and the share of repo volume trading at or above the IORB, Perli said.

These indicators tend to move together, he said. In 2018 and 2019 all the indicators signaled reserves were progressively becoming less abundant, then ample, and then eventually even less than ample, Perli said.

The Fed also has tools to deal with any unexpected turbulence, including the standing repo facility and the discount window, he said.

"Taken together, the indicators and tools at our disposal constitute a powerful set of instruments, and they support my confidence that the balance sheet reduction process can continue smoothly." (See: MNI INTERVIEW: Reforms Aid Brittle Treasury Market - SEC)