(Reuters) – An increase in bank reserves is putting downward pressure on short-term rates but the Federal Reserve is keeping a close eye on money markets and is prepared to make adjustments as needed, a senior New York Fed official said on Thursday.
As reserves rise, the Fed’s facility for overnight repurchase agreements will become a more central part of the central bank’s tool kit for controlling short-term rates, said Lorie Logan, an executive vice president at the New York Fed and the manager of the System Open Market Account.
“With reserves expected to grow further, we will be monitoring money markets closely and will continue to make adjustments as needed,” Logan said in prepared remarks for a virtual event organized by the Securities Industry and Financial Markets Association (SIFMA).
The facility helps to set a floor on short-term rates by giving financial firms a place to park cash in exchange for a return. Fed officials agreed at the March policy-setting meeting to increase the per-counterparty limit to $80 billion from $30 billion.
Logan also said last week that the central bank could expand access to the overnight repo facility by relaxing some of the eligibility requirements.
Some analysts say the Fed’s efforts to keep rates from turning negative may not go far enough and are speculating that the Fed may need to lift some of the short-term rates it manages.
While some short-term rates recently traded below zero and below the overnight repo rate, Logan said on Thursday that the activity “appears to be technical in nature.” She reiterated that the Fed could change “administered rates” if needed.
“The facility continues provide an effective floor,” Logan said. “However, we will continue to monitor money markets closely and make adjustments to ON RRP operations as needed.”
Source: Economy - investing.com
