New York Fed’s Reverse Repo Facility Experiences Cash Surge on Last Day of Q3, According to Reuters

By Michael S. Derby

NEW YORK – The New York Federal Reserve reported that eligible firms deposited $465.6 billion into its reverse repo facility on Monday, marking the largest inflow since late June. This surge is likely linked to the conclusion of the third quarter.

This figure represents the highest inflow since June 28, when the reverse repo usage was recorded at $664.6 billion. Typically, quarter-end dates see a spike in inflows, which tends to subside shortly thereafter, a trend that analysts and market participants expect to see again this time around.

The Fed’s reverse repo facility primarily accepts cash from money market funds, and the interest rate provided acts as a floor for short-term rates. The facility is often viewed as an indicator of excess liquidity within the financial system.

The overall utilization of the reverse repo facility has been declining for some time as the Fed has been unwinding pandemic-era stimulus measures. This has involved allowing Treasury and mortgage securities to expire without replacement, reducing the Fed’s total holdings from a peak of approximately $9 trillion in the summer of 2022 to about $7.1 trillion today.

Most of the decrease in the Fed’s balance sheet has occurred as cash has left the reverse repo facility in pursuit of more favorable private market rates. After experiencing negligible inflows at the beginning of 2021, the facility peaked at just over $2.6 trillion at the end of 2022.

Since that peak, the facility’s overall usage has been on an uneven decline. A key question remains whether the reverse repo tool will eventually return to minimal use, as many Fed officials anticipate. Meanwhile, market participants believe some firms may choose to retain cash with the Fed rather than exploring private market options for various reasons.

As the reverse repo facility approaches its lowest point, the ongoing reduction of the central bank’s balance sheet will shift toward depleting what has largely been a stable level of bank reserves.

The Federal Reserve aims to withdraw sufficient liquidity to maintain control over its benchmark overnight interest rate and accommodate typical money market fluctuations. However, the precise threshold for these adjustments remains uncertain, and Fed policymakers assert that more work remains in terms of reducing bond holdings.

Recently, Roberto Perli, who oversees the implementation of monetary policy at the New York Fed, stated, "I believe there is plenty of room to continue shrinking" the Fed’s holdings, citing a continued presence of ample liquidity in the markets.