MNI: Fed's Perli Flags Repo Volatility Risk Around Debt Limit
MNI (WASHINGTON) - The longer U.S. lawmakers take to lift or suspend the debt ceiling while the Fed presses on with QT, the greater the risk that money markets see high volatility after the issue is resolved, Roberto Perli, head of the New York Fed's markets desk, warned Wednesday.
As Treasury depletes its cash account at the Fed, money flows into the rest of the financial system in the form of bank reserves or investments in the overnight reverse repo facility at the Fed. After the debt ceiling is lifted, Treasury is expected to rebuild its account quickly, introducing "risks that reserves rapidly drop to levels near or below where policymakers want them to be," Perli said in remarks prepared for a Money Marketeers of New York University event in New York.
"In a situation like that, our reserve conditions indicators would still do their job, but they may not provide much or any advance signal" that reserves are approaching scarcer levels "that could result in considerable volatility in money markets," he said.
Various FOMC officials in January thought it may be appropriate to consider pausing or slowing balance sheet runoff until the resolution of the debt ceiling situation, Perli added, repeating the January meeting minutes guidance and without opining on the best course of action. Some Wall Street analysts expect the Fed to announce a pause to QT as early as this month after nearly three years. (See: MNI POLICY: Fed Seeks Market Signals To End QT, Pause Possible)
STANDING REPO FACILITY
The repo market is returning toward more normal conditions after a period in which very abundant liquidity suppressed nearly all volatility, Perli said, noting a higher share of transactions in the interdealer market that take place at or above IORB this year compared to last and tightness around reporting and Treasury settlement dates.
The Fed's standing repo facility is an important backstop for ensuring good rate control and the New York Fed is actively working to enhance its effectiveness, he said.
The Fed may also repeat morning operations that it conducted at year-end at the March quarter-end, but with early settlement of the morning auctions, Perli said. "This early settlement should reduce another friction that some dealers face."
"I encourage our counterparties to use the facility when it is economically convenient to do so, as well as to regularly test their ability to use it."