MNI: NY Fed's Logan-Administered Rates To Rise With Fed Funds

The Federal Reserve will likely keep its administered rates at similar ranges relative to the federal funds rate when the central bank lifts interest rates later this month, New York Fed's market chief Lorie Logan said Wednesday, suggesting it is possible higher interest rates could cause the overnight reverse repo facility to grow in the short-term.

"Administered rates create strong incentives in overnight markets, and the ON RRP provides a broad range of money market investors an alternative investment to support the federal funds rate and other overnight rates," she said in prepared remarks at a New York University event.

"My sense is that the current setting of administered rates relative to the target range has been working well and that it could continue to support effective policy implementation following any increase in the target range in coming months, although adjustments could be warranted over time," she said. The interest rate on reserve balances (IORB) is currently 15 bps above the bottom of the fed funds range, while the overnight reverse repo rate (ON RRP) is 5 bps above the bottom.

"With the high levels of liquidity in money markets, take-up at the ON RRP facility could increase as rates rise," she said, but over time "as the Committee reduces the size of the balance sheet, I expect usage in the ON RRP to decline."

Logan's remarks focused on the Fed's experience with USD4.6 trillion in asset purchases since March 2020, with the conclusion of that program in coming weeks. While offering some expectations that the runoff of the balance sheet to start later this year will be faster than after the financial crisis, she did not say specifically how fast runoff will be. "While the Fed has some experience shrinking its balance sheet, this process is still relatively novel," she said.

The New York Fed official emphasized the difference between purchases made for market functioning and to foster accommodative financial conditions. "I do not view them as equal parts of the monetary policy toolkit," she said. "I expect circumstances warranting sizable intervention to support market functioning to be extraordinarily rare."