Looking like a trillion bucks
Usage of the Fed’s Reverse Repo Program keeps growing.
If you hear a new or even a shocking word enough times, it usually loses its impact. But “trillion” never seems to get there. You’d think the numerous trillion-dollar federal stimulus packages would have desensitized me to it, but it is a tremendous amount of money.
So, it’s no small thing that the usage of the Federal Reserve’s Reverse Repo Program (RRP) has lately approached the $1 trillion mark. It was below $100 billion as recently as April. In March, the Fed increased the counterparty limit from $30 billion to $80 billion and then in June raised the rate to 5 basis points. Usage has steadily grown since then, and it’s been a valuable outlet for the money markets, which still are facing heavy demand.
A different Fed repo facility was in the news last week with the Federal Open Market Committee's (FOMC) announcement that the Fed has created a domestic standing repo facility (SRF) to replace the temporary open market operations it previously offered. (The Fed also announced the creation of a similar repo facility for foreign and international monetary authorities.) Although the Fed characterized these as being backstops for the money markets, the facilities are for borrowing rather than investing. While limited initially to primary dealers, the SRF will be expanded to other depository institutions. Although money funds will not benefit directly from them, we view their creation as yet another sign the Fed is preparing for the tapering process, which Chair Powell mentioned in his comments after the meeting. Also, the September 2019 repo market volatility came amid a decline in reserves, and the Fed does not want a repeat of that experience. The new facilities are a sign of good advance planning and perhaps a Fed that utilizes numerous existing facilities to promote market liquidity rather than emergency ones.
In the meantime, the biggest issue for cash managers remains the recent decline in Treasury bill issuance and the low supply of Treasury bills, a combination that continues to hold down yields. The decline in issuance is tied to the reinstatement of the federal debt limit on Aug. 1, and we expect constrained issuance until Congress takes action to raise the limit. The Treasury should have enough cash and other measures to meet the basic funding needs of the government into the fall. We fully anticipate lawmakers to eventually raise the limit or to suspend it again. Expect political theater, but not anything serious.
Not surprisingly, Powell sang the same refrain on inflation at the FOMC press conference. Policymakers won’t budge until core PCE and CPI are elevated for many months, and they are betting both indexes will pull back. We continue to think prices are stickier. While the National Bureau of Economic Research just dated the Covid-19 recession as lasting only from late February to early April 2020, it’s the aftermath that matters. The Fed needs to keep its head up.
The other trillion-dollar issue hanging around is the infrastructure deal. This week the Senate finally voted to take up the bill. But everyone—in particular state and local governments and the municipal market—is still playing the waiting game for the details. None of the above had led us to change the targeted weighted average maturities of our money market funds, which remain in ranges of 35-45 days for government and 40-50 days for prime and municipal.