By Michael S. Derby
(Reuters) -A top Federal Reserve Bank of New York official said on Monday that central bank tools are in place to manage liquidity and that some level of volatility in money market rates is healthy.
The official, Julie Remache, who is deputy manager of the bank’s System Open Market Account and Head of Market and Portfolio Analysis, spoke a day before markets are likely to undergo a heavy round of volatility tied to the quarter end.
Financial firms’ need to manage liquidity for things like reporting purposes is likely to send money flooding into central bank tools like reverse repos and the thus far little used Standing Repo Facility, or SRF. The turbulence is expected to be short-lived. But it comes as the Fed may be nearing an endgame for its long-running process of shrinking its balance sheet.
“Our indicators currently suggest that reserves are still abundant,” Remache said in the text of a speech, indicating she does not see a looming need to end the process of what is called quantitative tightening, or QT. But the official did note there’s been some “firming” of repo rates of late, and that ongoing QT could work to keep those rates up over time.
With quarter end almost on markets, Remache said that even though the central bank’s rate control is working well and strongly influencing the setting of interest rates generally, “money market rates still vary, and tend to rise on key reporting dates, including quarter ends, as banks optimize their balance sheets.”
This firming of rates around the quarter end “is – within limits – normal, not concerning, and exactly what we expect as we continue to normalize our balance sheet.”
Remache reminded markets that the Standing Repo Facility, which takes in bonds from eligible firms in exchange for fast cash, is there to manage short-run swings in liquidity needs. She noted the SRF in its limited usage has worked, explaining the facility “can stem incipient rate pressure that, if left unaddressed, could threaten rate control.”
(Reporting by Michael S. Derby; Editing by Andrea Ricci)
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