MNI POLICY: Fed Expects to Expand ONRRP Eligibility--Logan

The Federal Reserve will offset downward pressure on money market rates by focusing policy adjustments on its overnight reverse repo facility including possibly expanding counterparty eligibility in coming months, and if undue downward pressure were to lower the fed funds rate more then the central bank would hike policy rates, New York Fed's market chief Lorie Logan said Thursday.

The Fed's benchmark rate, the effective federal funds rate, and other overnight unsecured rates have "softened modestly," said Logan in a speech at the Annual Primary Dealer Meeting, but downward pressure on overnight repo rates have been "more pronounced."

"In this environment, the overnight reverse repo (ON RRP) facility is likely to become an increasingly important element of our operating framework," she said. The ON RRP rate is currently set at zero, and the per-counterparty limit was raised at the March FOMC meeting to USD80 billion from USD30 billion.

COUNTERPARTY ELIGIBILITY

Logan said the per-counterparty cap was increased because of an increase in government MMFs, a major group of money market investors, which has become more concentrated at the largest funds since 2014, when the cap was set.

The New York Fed market chief said central bank staff has reviewed access to the ON RRP facility, presenting an opportunity to consider potential adjustments in line with the New York Fed's broader efforts "to ensure that our counterparty policies promote a fair and competitive marketplace."

In "coming months" the Fed expects "to reduce the size and activity thresholds for ON RRP counterparty eligibility, which will help achieve these goals." Former Fed officials have told MNI the ON RRP is a more appropriate facility to help deal with market conditions.

"Expanding counterparty eligibility can reduce barriers to entry and foster inclusivity by potentially making our operations accessible to smaller firms. A more vibrant and diverse marketplace could, in turn, strengthen the effectiveness of monetary policy implementation tools."

UNDUE PRESSURE

And to deal with downward pressure on the fed funds rate, Logan said the central bank could consider adjusting its policy rates.

"The Federal Reserve may consider adjusting administered rates if undue downward pressure on overnight rates emerges," she said, echoing comments from Chair Jay Powell, who said in meeting minutes released earlier this week "it might be appropriate to implement adjustments to administered rates at upcoming meetings or even between meetings."

The IOER is currently set at 10 bps, well below the top of the Fed's target range of 25 bps. The effective fed funds rate has hovered around 7 bps for months.

Former officials have told MNI the Fed is likely to be patient in making adjustments to IOER.