The latest Federal Reserve meeting minutes reveal a potential adjustment to a tool used for controlling the benchmark interest rate. During the November policy meeting, some policymakers suggested a "technical adjustment" to the offering rate of the overnight reverse repurchase agreement (RRP) to align it with the lower end of the federal funds rate target range.
The minutes from the meeting, which concluded on November 7, indicate that reducing the RRP offering rate by 5 basis points could align it with the lower end of the federal funds rate target range, potentially exerting downward pressure on other money market rates. Currently, the overnight reverse repo rate stands at 4.55%, which is 5 basis points higher than the lower end of the Fed's target range of 4.5%-4.75%.
Since peaking in December 2022, the balance of this key Fed tool has decreased by approximately $2.4 trillion, though the rate of decline has slowed in recent months. On Wall Street, the funds held in overnight reverse repos are considered a measure of excess liquidity in the market, especially as the Fed continues to reduce its balance sheet through quantitative tightening.
Gennadiy Goldberg, Head of U.S. Rates Strategy at TD Securities, noted that the inclusion of potential RRP rate adjustments in the meeting minutes suggests the Fed might take action if money market rates face pressure at month-end or year-end. However, given the recent decline in overnight reverse repo balances, such an adjustment may not happen soon. On Tuesday, 51 counterparties placed $148.8 billion in funds with the Fed through overnight repos, marking the lowest level since November 5.
