Wrightson ICAP: Elevated RRP Takeup To Persist, Fed To Widen IORB-RRP In Q4

Among other observations on Wednesday's July FOMC minutes release, Wrightson ICAP notes the Fed staff's reiterated view that overnight reverse repo facility demand would drop off in the coming months (Minutes: "ON RRP balances were expected to decline over time as balance sheet runoff proceeded. The deputy manager noted that this process would involve adjustments across a number of markets and that the staff would continue to monitor developments in money markets closely").

• But, per Wrightson ICAP: "Our own view is that the market may need a little help in the form of a wider IORB-RRP spread to achieve that outcome, but the minutes did not address that question.
• "Importantly, though, the minutes suggested that the Fed recognized the uncertainty in the outlook. The staff warned that “this process would involve adjustments across a number of markets” and that the Fed would need to “continue to monitor developments in money markets closely”.
• "Our own guess is that RRP volumes will remain so sticky this fall that the Fed will start to widen the IORB-RRP rate spread in the fourth quarter. The minutes steered clear of that discussion, but acknowledged that the outlook is complicated and may require a flexible response from the Fed."