Tighter money market conditions and increasing repo rates have also led to increased usage of the Standing Repo Facility (SRF). Over the past two months, repo rates — including in the tri-party segment of the market where the NY Fed operates the SRF — have climbed above the SRF minimum bid rate on some days, and the facility has seen more frequent usage and larger volumes.
Tri-party repo rates occasionally rising somewhat above the top of the target range is not concerning because the target range is defined in terms of the federal funds rate. It is also not unheard of from a historical perspective as repo rates are inherently more volatile than federal funds rates.
However, tri-party repo rates persistently or substantially above the top of the target range would be more problematic because they could pull up the EFFR and pose difficulties for rate control. This is why having a ceiling tool like the SRF is of fundamental importance, explained Roberto Perli, manager of the System Open Market Account at the New York Federal Reserve, in a recent speech.
Although the SRF has seen more frequent usage of late, a notable amount of repo transactions still have taken place in the market at rates above the SRF minimum bid rate.
“Our market outreach suggests that some dealers may be unwilling to negotiate with money market funds, or divert funding to the SRF in large size, if repo pressures are moderate and only expected to last for short periods of time,”
In part this might be because relationships matter in the repo market; dealers value the stable funding flows that money market funds provide, and if the added cost of borrowing from a money market fund at a somewhat elevated rate is only modest, they may prefer to absorb that cost.
This may change, however, as SRF usage becomes more commonplace — similar to how the existence of the ON RRP came to provide money market funds with negotiating leverage when reserves were abundant, and in so doing provided the Fed with very strong rate control.
“If repo pressure persisted, or intensified, I do expect that the SRF will be used more broadly and to a much larger extent, thus dampening the upward rate pressure,” he said.