(Bloomberg) -- The amount of money investors park at a major Federal Reserve facility dropped below $250 billion for the first time since 2021.
Some 44 participants on Monday put a combined $239.4 billion at the Fed’s overnight reverse repurchase agreement facility, which is used by banks, government sponsored enterprises and money-market mutual funds to earn interest. It marks a steep decline from the record $2.554 trillion stashed on Dec. 30, 2022, according to New York Fed data. The 44 counterparties is the lowest since June 2021.
Market participants are closely watching the pace at which the facility, known as the RRP, empties. Some on Wall Street warn the draining facility is evidence that excess liquidity has been removed from the financial system and bank reserve balances are less abundant than policymakers believe. The central bank in June started shrinking its balance sheet at a slower pace, reducing the amount of Treasuries it lets roll off every month and therefore easing a potential strain on money-market rates.
Barclays Plc reiterated earlier this month it expects balances to fall below $150 billion at the end of the year and still sees the Fed’s balance-sheet unwind — a process known as quantitative tightening, or QT — concluding in December 2024.
From the time the government suspended the debt ceiling in June 2023 until April of this year, demand for the Fed’s facility dropped by about $1.8 trillion, driven by a deluge of bill supply. At that point, Wall Street strategists expected the RRP to be completely emptied in the first half of 2024. Instead, usage largely stabilized as bill issuance fell and uncertainty about the timing of interest-rate cuts kept cash parked at the RRP.
With market expectations recently growing for the start of the Fed’s easing cycle, balances at the facility have been trending lower in the second half of the year, despite the recent dropoff in Treasury bill supply, driven by money funds’ desire to lock in higher interest rates, as well as the proliferation of other assets in which they can invest.
--With assistance from Carter Johnson.
©2024 Bloomberg L.P.
