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Banks and other financial firms on Thursday piled a record $485.33 billion into the Federal Reserve’s overnight, reverse repo facility as Wall Street continues to grapple with where to park all its cash.
The Federal Reserve Bank of New York’s overnight reverse repo program (RRP) already was fetching near-record demand in the past week, after almost no one used it for months.
Now, there’s a new high-water mark for the facility, viewed by some as an investment opportunity of last resort, because it currently offers no return but also costs banks less to use than paying heavier deposit fees to keep cash in-house.
Here’s a chart showing usage of the Fed’s daily reverse repo facility from 2014 through Wednesday.
Record reverse repo demand
Federal Reserve Bank of New York
More focus has been placed on the plumbing of global financial markets since the 2008 financial crisis caused credit to seize up.
In Sept. 2019, demand spiked for another short-term Fed funding facility, amid a liquidity crunch that major financial powerhouses, including JPMorgan Chase & Co.
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, said partly stemmed from crisis-era banking regulations that made it harder for banks to extend their balance sheets.
Lately, demand for repo facilities has been watched for signs that the U.S. central bank might potentially lose its grip on its benchmark lending rates, particularly as the Fed wrestles with now long to maintain its monetary policies as trillions worth of pandemic aid sloshes through markets, without pushing inflation and asset prices into overdrive.
Several factors have been pegged as culprits of the recent surge in Fed reverse repo usage, including a cash and collateral imbalance fueled by a year-plus of the Fed’s $120 billion-a-month bond purchases, known as quantitative easing.
See: Why demand for Fed’s reverse repo facility is surging again
The Fed, under Chairman Jerome Powell, has purchased about $2.5 trillion in bonds since the pandemic broke out last year, through its monthly purchases of U.S. Treasurys
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and agency mortgage bonds
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The size of the central bank’s balance sheet currently sits at a record of nearly $8 trillion, up from about $4.2 trillion before the pandemic’s outbreak.
