Fed’s Repo Facility Funds Dwindle Amid Market Volatility and Increased Treasury Borrowing

As the U.S. stock market experiences challenges and Treasury borrowing increases to manage the government’s significant budget deficit, the Federal Reserve’s overnight reverse repo facility—a key indicator of liquidity—has seen a marked decline in funds from institutional investors. These funds have decreased from $2.5 trillion in December to $1.1 trillion currently.

This decline coincides with the market indices moving closer to correction territory and an anticipated rise in Treasury debt issuance aimed at addressing an estimated federal budget deficit of $1.7 trillion for the fiscal year 2023, representing a 23% increase compared to the previous year. Wall Street is also bracing for an additional $1.5 trillion in Treasury borrowing needs.

In light of these developments, the Fed is expected to maintain its policy interest rate at a 22-year high of 5.25%-5.5%.

This situation is evolving amid fluctuations in the U.S. stock and bond markets, with a projected 2.2% weekly decline in major indices and significant expected losses in the communications services and energy sectors of the S&P 500. The benchmark interest rate remains steady at 4.84%, after recently rising above 5%, a level not observed since 2007.

Additionally, the Nasdaq Composite Index has fallen by 2.9% this week, while the Federal Reserve continues to prioritize its 2% annual inflation target.