By Michael S. Derby
(Reuters) – The Federal Reserve Bank of New York said Wednesday that late next month it will add morning offerings for its liquidity providing Standing Repo Facility.
The morning Standing Repo Facility, or SRF, operations will join with existing afternoon operations, and will be available starting June 26. “The additional daily morning SRF operations are intended to further enhance the effectiveness of the SRF in its ability to support the effective implementation of monetary policy and smooth market functioning,” the bank said in a statement.
The SRF was launched in 2021 in a bid to bolster the central bank’s ability to provide liquidity to the financial system. It also helps the Fed keep the federal funds rate, its chief tool for influencing the course of the economy, in line with levels targeted by the rate-setting Federal Open Market Committee.
The SRF takes in Treasury and agency securities from eligible firms in exchange for fast cash loans, and essentially makes available on a constant basis liquidity once provided by discretionary Fed repo operations.
The tool has essentially gone unused through its lifespan with the exception of modest usage at the end of the third quarter last year, when money markets navigated a short-lived period of stress.
Roberto Perli, the New York Fed official responsible for implementing monetary policy for the central bank, had been noting that morning operations would join those offered in the afternoon.
“This will be an important step in enhancing the efficacy of the facility,” Perli said last Thursday, and a more effective SRF could also allow the Fed to shrink its holdings of bonds by more than would otherwise be the case. He also nudged reluctant financial firms to tap the SRF, saying “I encourage our counterparties to use the SRF when it makes economic sense.”
The morning SRF availability will kick off on June 26, with the cadence of afternoon operations remaining as they are now. In a statement, the New York Fed said that it will cap total daily SRF operations at $500 billion. The closing time for the morning operations will be 8:30 a.m. ET.
Early SRF operations have already been deployed around year and quarter ends, and while they have gone unused, some believe their availability helped bolster market confidence around periods that can be volatile in money markets.
The New York Fed’s SRF announcement followed closely on the heels of the release of minutes from the Fed’s meeting minutes covering its early May Federal Open Market Committee meeting. The minutes weighed in heavily on the unsettled financial conditions that abounded in the run up to that gathering, spurred on by President Donald Trump’s global trade war.
While stress was real and broad based during that period, the minutes noted that Fed staff as well as policy makers saw orderly trading amid the tumult. Fed officials also signaled some concern on valuation levels in markets.
The minutes also touched on the SRF, and noted “market outreach indicated that dealers had a higher willingness to use the facility when early settlement was offered.” The minutes also said some Fed officials believed that a move to central clearing for the SRF might bolster usage in times of trouble.
The looming launch of early SRF operations may not change much for now, however. Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York, said “usage of the regular afternoon SRF currently stands at zero and we don’t expect SRF usage to increase simply because of the added operation.”
“During times of stress, conducting twice daily operations will be helpful in helping to backstop markets,” Goldberg said, adding “there will probably still be some stigma in using the facility, which is something the Fed has been battling against in recent years, but the additional operation should eventually prove helpful.”
Stigma issues have dogged parts of the Fed’s lending operations for some time, because many financial firms believe that tapping central bank cash, even when encouraged to do so by central bankers, signals weakness. Stigma issues have been most acute for the Fed’s Discount Window lending facility for deposit taking banks, but some have said these concerns extend to the SRF as well.
(Reporting by Michael S. Derby and Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama)
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