Advertisement

Updated December 27th, 2023 at 17:39 IST

Fed liquidity drains moves spotlight to usage of new lending facility

This wouldn't indicate financial distress but rather the intended functionality of the financial system.

Business Desk
The Federal Reserve
The Federal Reserve | Image:Reuters Photo
Advertisement

The year-end poses a potential trial for the Federal Reserve's Standing Repo Facility (SRF), an underutilised central bank liquidity tool introduced in 2021. Although a surge in activity remains anticipated, it's not expected to materialise until next year.

Fed's SRF utilisation 

Market insiders speculate that during the year's anticipated market volatility, the Fed's SRF might witness noticeable utilisation. This potential activity, however, wouldn't indicate financial distress but rather the intended functionality of the financial system.

Functioning as an automatic market stabiliser, the SRF accepts Treasury securities from eligible financial entities, primarily major banks supporting the government securities market. It swiftly converts these securities into cash, aiming to prevent liquidity crises akin to the severe disruptions witnessed in spring 2020.

Advertisement

Despite ample liquidity injected by the Fed, the SRF hasn't experienced substantial demand thus far. However, recent minor trials have served as reminders that eventual utilisation of the SRF is imminent.
Scott Skyrm of Curvature Securities suggests that the year's end might initiate the SRF's debut, given the general collateral repo rate trading slightly above the SRF rate, creating a modest incentive for eligible firms to engage with the Fed.

Nevertheless, any current SRF usage is likely to be limited. The real test lies ahead as the Fed continues to reduce its balance sheet. This reduction, amounting to nearly $100 billion monthly in matured, unreplaced Fed-owned bonds, is anticipated to continue for an extended period.

Advertisement

Reserve drawdown dynamics 

Federal Reserve Bank of New York President John Williams acknowledges the ongoing drawdown of reserves but assures abundant reserves currently exist. Markets, however, remain less optimistic and anticipate potential changes by the second or third quarter.

Advertisement


The fate of the SRF's activation seems tied to the reverse repo facility's trajectory. Analysts like Joseph Wang anticipate SRF utilisation to gain traction only after the reverse repo facility reaches negligible usage, a process expected in the first half of the upcoming year.


(With Reuters inputs)

Advertisement

Published December 27th, 2023 at 17:39 IST

Your Voice. Now Direct.

Send us your views, we’ll publish them. This section is moderated.

Advertisement
Advertisement
Advertisement
Advertisement
Advertisement
Whatsapp logo