The Federal Reserve Bank of New York said on Friday it accepted $1.018 trillion at its overnight reverse repo facility, as inflows to the central bank liquidity facility surged on the year’s final trading day. The Fed’s RRP facility exists to put a floor underneath short-term interest rates. It is a vital tool in the Fed’s arsenal as it raises rates and shrinks its balance sheet to combat high inflation. Its inflow on Friday was the highest since Nov. 13.
The influx into the Fed’s RRP is likely driven by the same factors that drove money market fund (MMF) inflows this year. The Fed’s decision to lift banks’ requirement to maintain minimum reserves pushed cash into MMFs, which had to invest that cash somewhere. MMF inflows then accelerated when the Federal Reserve started raising rates, which drove investors to seek safer alternatives.
That shift in investor demand for lower-risk investments also pushed cash into the ON RRP, which provides a way for money market funds to protect themselves against interest rate risk. Aggressive Fed tightening has further boosted that demand, which has made investors more uncertain about the pace and terminal interest rate. The ON RRP’s ability to shield MMFs from interest rate risk has helped halve the weighted average maturity of MMF investments this year.
Those MMF investments were dominated by commercial paper (CP), which accounted for nearly half of the fund’s holdings this year. Treasury bills have seen their share decline as the supply of outstanding bills has slipped toward historical lows. Certificates of deposit (CDs) and other, primarily time deposits, have each seen their shares increase this year.
Inflows to the ON RRP are cleared and settled through a triparty repo transaction, in which the Desk sells securities to a counterparty and then repurchases those same securities later for an agreed-upon price. The securities are then transferred from the counterparty’s account at a clearing bank to the Fed. The clearing bank acts as the agent to the Desk and its counterparty, taking custody of the securities, valuing them, and settling the transactions.
The New York Fed’s open market operations are conducted under the authority and direction of the Federal Open Market Committee. The Desk’s responsibilities include conducting open market operations to help keep the effective federal funds rate in its target range. The Desk conducts swap transactions with primary dealers, financial institutions, and eligible governmental entities. It also participates in specific small-value exercises of its central bank liquidity swap facilities with foreign central banks.
The New York Fed selected PFM Financial Advisors LLC through an RFP process to provide short-term consulting services to advise it on its municipal liquidity facility (MLF) design and setup. PFM will advise the MLF in credit, portfolio risk management, reporting and analytics, and MLF’s relationships with its eligible municipal issuers and other stakeholders.
