(Graphics: A relief valve for excess cash – )
Usage soared to a record $485.3 billion last week, up from nearly nothing in March. The reverse repo rate – currently at zero – sets the floor by giving firms a risk-free place to park some of their cash overnight. Together, the two are designed to form the “corridor” for the fed funds rate. It could also lift the rate on the facility soaking up much of the extra cash: reverse repurchase agreements, or reverse repos, which are open to non-banks such as money-market funds. The central bank’s options for responding include lifting the interest it pays on excess reserves, or IOER, which is currently at 0.10% and is available only to banks. The lowest it has ever settled on a daily basis is 0.04%. It is hovering near the bottom of the Fed’s target range of zero to 0.25%. The effective federal funds rate – the central bank’s critical policy rate – slipped as low as 0.05% at the end of May before rising back to 0.06%. A senior official from the New York Fed advised them they may want to consider making a minor technical adjustment to rates “in the coming months” if the downward pressure on overnight rates continued. rates strategist for TD Securities.įed policymakers were briefed by staff on money market issues at their last meeting in April. “They’re getting cash in the door and aren’t able to find good places to invest it,” said Gennadiy Goldberg, a senior U.S. The situation is also a headache for money market funds, which are absorbing much of the money and finding fewer options for investing it, a dynamic the Fed is watching closely. The Treasury General Account, or TGA, has dropped by nearly $1 trillion since last fall, mirrored by the surge in bank reserves.Īll that cash is pushing down short-term rates and increasing expectations the Fed will need to respond with a technical adjustment at its June 15-16 meeting, if not earlier, in order to keep its key policy rate from sliding further. The banking system is swimming in nearly $4 trillion of reserves, thanks in part to the Fed’s asset purchases, a fall off in Treasury bill issuance and a rapid drawdown in the government’s store of funds at the Fed. The payout these days: Zero percent.īut usage is soaring to record highs as money market funds and other eligible firms cope with what some analysts are calling a “tsunami” of cash. central bank in exchange for at best a small return. Nowhere is this more evident than in the rising popularity of a Federal Reserve program that lets firms stash their cash overnight with the U.S. (Reuters) – Banks have too much cash on their hands – and they’re running out of places to put it.