A wall of cash is continuing to flow into a central bank facility designed to help control short-term interest rates, even as officials expect activity there to decline over time.
On Thursday, the Federal Reserve Bank of New York said that a day after the U.S. central bank pushed up its short-term target rate by a large 0.75 percentage point to between 3% and 3.25%, money-market funds and others parked a record $2.359 trillion at the New York Fed’s reverse repo facility.
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A wall of cash is continuing to flow into a central bank facility designed to help control short-term interest rates, even as officials expect activity there to decline over time.
On Thursday, the Federal Reserve Bank of New York said that a day after the U.S. central bank pushed up its short-term target rate by a large 0.75 percentage point to between 3% and 3.25%, money-market funds and others parked a record $2.359 trillion at the New York Fed’s reverse repo facility.
The facility last saw a record inflow on June 30, at $2.329 trillion. That surge came at the end of a quarter, often a time where the reverse repo facility pulls in a significant amount of money due to temporary market factors.
The Fed’s reverse repo tool takes in cash, primarily from money-market funds. It is designed to help set a lower end for short-term interest rates. After the Fed’s rate rise Wednesday, the rate now stands at 3.05%, up from 2.30% in place before the Fed lifted rates.
The Fed uses another tool, called the interest on reserves balances rate, now at 3.15%, to set a high end for short-term rates. Together, both rates drive the market-based setting of the federal-funds rate, the central bank’s primary tool to achieve its inflation and job mandates.
The Fed has seen surging inflows into the reverse repo facility for some time. While the tool effectively had no use up until April of last year, cash has been pouring in ever since, and inflows have hovered above $2 trillion a day since June.
Market participants have tied a lot of the reverse repo usage to the period when the Fed was flooding the financial system with liquidity via its Treasury and mortgage stimulus purchases. But the Fed is now shrinking its holdings, and officials have argued that reverse repos would likewise shrink over time.
“Just as use of the [overnight reverse repo] facility expanded as the balance sheet grew, shifts in money markets that accompany balance sheet runoff, along with incentives provided by administered rates, should result in ON RRP balances declining from currently elevated levels over time,” Patricia Zobel, New York Fed System Open Market Account Manager pro tem, said in a speech on Sept. 8.
That said, Fed officials did recognize that in the initial phase of the central bank’s rate-rise process the reverse repo facility could draw increasing inflows as it might pay more than private offerings.
The reverse repos might also be pulling in cash due to the unsettled and volatile movement of financial markets recently, making the safety and security of parking cash at the Fed an attractive option for many money managers.
Write to Michael S. Derby at michael.derby@wsj.com