The Fed's decision to launch large-scale Reserve Management Purchases (RMPs) ahead of schedule implicitly signals that its standing repo facility is not functioning as effectively as hoped. This suggests the Fed is opting to inject liquidity directly rather than rely on the facility, which may require future improvements.
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Beyond its stated goals of employment and price stability, the Fed's recent aggressive asset purchases show its primary role is often to ensure smooth market functioning, making it dependent on market signals.
The Fed's SRF is proving ineffective at capping repo rates. Despite rates trading well above the facility's level, usage was minimal. This indicates a market stigma or hesitation, questioning its ability to function as a reliable backstop for temporary liquidity shortages and control rates.
The Fed's T-bill purchases are a technical maneuver to manage bank reserves and avoid distortions in the bills market. Unlike Quantitative Easing (QE), the primary goal is not broad economic stimulus, but to ensure the smooth functioning of money markets, a critical distinction for interpreting Fed actions.
The common narrative of the Federal Reserve implementing Quantitative Tightening (QT) is misleading. The US has actually been injecting liquidity through less obvious channels. The real tightening may only be starting now as these methods are exhausted, signaling a significant, under-the-radar policy shift.
The Fed has a clear hierarchy for managing liquidity post-QT. It will first adjust administered rates like the Standing Repo Facility (SRF) rate and use temporary open market operations (TOMOs) for short-term needs. Direct T-bill purchases are a more distant tool, reserved for 2026, as the system is not yet at 'reserve scarcity'.
Despite the Fed's larger-than-expected asset purchase program, the primary near-term risk is that it may still fall short of the reserves needed for smooth market function, echoing the 2019 repo crisis.
Dallas Fed's Lori Logan has signaled a potential shift away from targeting the Fed funds rate. As the Fed funds market has become inactive and is no longer a true market, targeting a traded repo rate would provide better real-time feedback on liquidity and policy implementation.
Recent spikes in repo rates show funding markets are now highly sensitive to new collateral. The dwindling overnight Reverse Repo (RRP) facility, once a key buffer, is no longer absorbing shocks, indicating liquidity has tightened significantly and Quantitative Tightening (QT) has reached its practical limit.
If the Fed adopts a repo rate like TGCR as its policy benchmark, its Standing Repo Facility (SRF) must evolve. It would shift from being a passive emergency backstop to an active tool for daily rate management, similar to how the Fed's RRP and IORB rates currently operate.
The Fed’s Standing Repo Facility (SRF) has been only partially effective at capping overnight funding rates. Its efficacy could be improved through structural changes like making it centrally cleared, offering it continuously for on-demand liquidity, or lowering its rate to separate it from the discount window.