(Bloomberg) -- The Federal Reserve is once again considering a tweak to one of the tools used by the US central bank to help control its main benchmark, according to its latest minutes.
Some policymakers at the November policy meeting said they see value in considering a “technical adjustment” to the offering rate on the central bank’s overnight reverse repurchase agreement facility, known as the RRP, so that it’s equal to the bottom of the target range for the federal funds rate.
“Lowering the ON RRP offering rate five basis points would align the ON RRP offering rate with the bottom of the target range for the federal funds rate and would probably put some downward pressure on other money market rates,” according to the minutes of the gathering ended Nov. 7.
The current rate for the RRP is 4.55%, which sits about five basis points above the bottom of the Fed’s policy target range of 4.5% to 4.75%.
Balances at the key Fed facility have dropped by about $2.4 trillion since their December 2022 peak, though the pace of declines has slowed in recent months. On Wall Street, the sum of cash parked on the RRP has long been considered a barometer of excess liquidity — a useful gauge for market participants as the central bank continues to unwind its balance sheet via a process known as quantitative tightening.
To Gennadiy Goldberg, head of US interest rate strategy at TD Securities, the inclusion of this consideration in the central bank’s minutes shows that “the Fed could take this step if there is some pressure in money market rates at month-end or year-end.”
“Given the recent decline in RRP balances, however, this change may not be imminent,” he said. Fifty-one counterparties parked $148.8 billion at the RRP on Tuesday, the lowest since Nov. 5.
Dallas Fed President Lorie Logan said in a speech last month if balances in the facility don’t decline as repo rates rise closer to the interest rate on reserve balances, it may be appropriate to reduce the RRP rate.
Officials last tinkered with the tools when it raised the rate on the RRP facility in June 2021 as a dollar glut in short-term funding markets outstripped supply of investable securities and weighed down front-end rates, despite the steadiness of the Fed’s key benchmark. At the time, there was $521 billion in cash squirreled away at the overnight RRP facility.