Minutes of the Federal Open Market Committee
April 27–28, 2021
The staff briefed participants on the Federal Reserve’s experience with the daily repo operations with primary dealers that have been in place since September 2019 and the temporary Foreign and International Monetary Authorities (FIMA) Repo Facility established in March last year. The briefing also reviewed considerations that could be relevant for policymakers’ judgments regarding whether these arrangements should become permanent standing facilities. The staff noted that repo operations have been a useful tool in controlling the federal funds rate by adding reserves to ensure that they remain ample and by limiting pressures in repo markets that could spill over into unsecured markets. In March 2020, repo operations worked in concert with other measures to manage shocks to financial markets by stabilizing Treasury market conditions. Since June 2020, when the rate on overnight repo operations was raised relative to the rate of interest on excess reserves, repo operations have served as a backstop and there has been no substantive usage. Regarding considerations concerning a permanent standing repo facility, the briefing noted that standing repo operations could be viewed as useful in forestalling funding strains that could spill over into other overnight markets and limit dealers’ intermediation activity in financial markets. However, a standing repo facility could be seen as a form of liquidity support for nonbank financial institutions, and one that could create incentives for firms with access to the facility to take on more liquidity risk against eligible securities than would otherwise be the case. In discussing considerations for the establishment of a standing FIMA repo facility, the staff noted that such a facility could limit the propensity for foreign official institutions to execute large sales of U.S. Treasury securities in a stress environment that, in turn, could exacerbate strains in broader U.S. domestic financial markets. The briefing also noted some potential drawbacks of such a facility, including less transparency regarding its operations relative to other Federal Reserve facilities.
In their discussion of considerations related to the establishment of a standing repo facility as part of the Committee’s overall approach to policy implementations in an ample reserves regime, a substantial majority of participants saw the potential benefits of an appropriately calibrated facility as outweighing the potential costs. Nearly all participants commented that a standing repo facility, by acting as a backstop, could help address pressures in the markets for U.S. Treasury securities and Treasury repo that could spill over to other funding markets and impair the implementation and transmission of monetary policy. In this regard, a number of participants noted the potential for pressures in short-term funding markets to arise from time to time, even with monetary policy operating in an ample-reserves regime. Many participants noted that a standing facility could provide a timely and automatic response to incipient market pressures; they remarked that such pressures can be difficult to anticipate and, as a result, might not be as promptly addressed with discretionary operations. A few participants noted that a standing repo facility could provide counterparties with additional flexibility in managing the composition of their holdings of high-quality liquid assets, potentially reducing the demand for reserves. A few participants cautioned that establishing a standing repo facility should not be viewed as a way of implementing monetary policy without an ample supply of reserves. A couple of participants remarked that most of the benefits of a standing repo facility could be realized by the Federal Reserve maintaining readiness to conduct repo operations on short notice as needed, noting that such an arrangement could avoid some of the costs of a standing facility. A few participants mentioned that a standing repo facility could be perceived as a means of supporting the financing of the U.S. Treasury or as a permanent Federal Reserve liquidity backstop for nondepository institutions; a couple of others called out the risk that such a facility could crowd out private market sources of liquidity provision.
Participants noted that it would be important to carefully consider key design elements of a potential standing repo facility, including the pricing structure, counterparties, and range of collateral accepted. A number of participants commented that the counterparties at such a facility should include depository institutions. Several participants noted the facility’s design should be targeted specifically to enhance control of the federal funds rate rather than to limit volatility in the repo market.
In their discussion of considerations related to the establishment of a permanent FIMA repo facility, a vast majority of participants saw the potential benefits as outweighing the costs. Participants highlighted a number of benefits of a standing FIMA repo facility, with many noting that it could support smoother functioning in U.S. Treasury securities markets and U.S. financial markets more broadly by providing foreign official holders of U.S. Treasury securities with an alternative to outright sales of these securities in times of market stress. A few participants noted that, had a FIMA repo facility been in place in March 2020, it likely would have significantly damped pressures in these markets caused by the abrupt need for dollar funding abroad. Several participants suggested that a standing FIMA repo facility could be viewed as complementing the existing dollar swap lines by extending access to dollar funding for a broader range of central banks and foreign official institutions. Participants also commented on some potential risks of a standing FIMA repo facility, including less transparency in connection with FIMA repo operations relative to other Federal Reserve facilities.